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Final Report Of the Committee On Corporations, Commissions, and Authorities, 2010

Recommendations For Continuing Legislative Reform Of Public Authorities Introduction The historic Public Authorities Reform Act (PARA) took effect on March 1, 2010. This sweeping legislation builds on the reforms enacted in the Public Authorities Accountability Act of 2005 (PAAA), bringing long-needed reform and fundamental change to New York’s “Soviet-style bureaucracies,” improving the lives of all New Yorkers and the financial future of the state. The legislation is a fundamental, top to bottom reform of New York State’s 700 public authorities. Members of public authority boards now have an explicit fiduciary duty to the authority and its public mission, and are no longer being beholden to or controlled by those who appoint them. State authorities must submit to the Comptroller all no-bid contracts costing over $1 million and those paid for with appropriated funds. They are required to follow MWBE, lobbying disclosure, and reporting requirements, and must create a whistle blower program to protect those who report authority misconduct. Perhaps most importantly, the legislation creates an independent Authorities Budget Office (ABO) with powers of investigation, referral, and oversight. The ABO has already begun to ensure that authorities abide by all elements of the new law. Going forward, there are additional reforms that will ensure that New York State continues its leadership role in the effort to make public authorities more effective and accountable. The success of the authority reform effort is by no means assured. Vested interests, both within and without the network of public authorities are already seeking to weaken the new legal reforms, and to minimize enforcement of the law. It would be unfortunate and unnecessary if this were to occur. We have spoken with the ABO the Millstein Advisory Task Force, held hearings and investigations on various state and local authorities and compiled the following recommendations we believe are most important to protect and enhance the reform mission going forward. Dissolution of Unneeded Public Authorities Among the hundreds of public authorities there are many which could be eliminated. These fall into three categories. First, those that are essentially defunct and not in operation. We believe there are well over 100 of these. Assemblyman Hoyt and Assemblyman Brodsky introduced legislation to dissolve them (A.11106). This bill should be supported by the new Administration and enacted into law early in 2011. The second are those that are duplicative. We believe there are hundreds of these as well. For examples, it remains unclear why any individual County needs numbers of IDA's when their function could all be handled by a single entity, or why ESDC needs innumerable subsidiaries to carry out it's mission. The process of assessing such duplication for both state and local authorities is a combination of common sense and technical analysis that requires more information about authority operations than is currently available. The needed analyses are constrained by the inadequate staffing now provided to the ABO, which is charged with assuring that such duplication is eliminated. Third, there are functioning, non-duplicative authorities that may not be needed as part of government's core mission. These include large entities such as LMDC or the Canal Corporation, as well as the proliferation of development corporations. The same technical and common sense analysis needs to be extended to these as well. 1

These are the first achievable and concrete steps in our efforts to shrink the size of government and reign in public debt. Governor-elect Cuomo has spoken repeatedly of the need to reduce the number of state and local government bodies. The Millstein Task force recommends that public authorities review their subsidiaries and dissolve those that are not necessary. The Task Force also recommends the ABO lead the review of public authorities which may not be needed. It must be emphasized that this review is more highly technical and difficult than is generally thought. It will require not only a review of function and purpose, but of debt structures and relation to activities of state agencies. We again caution that this review requires additional staff at the ABO, which must be provided immediately. Ban “Bonuses” and Contingent Compensation Committee investigations have revealed a pattern of excessive compensation at some authorities, usually local authorities. Excessive compensation is usually but not always in the form of contingent compensation and includes practices that are part of collective bargaining agreements and payments to managers or executives. There appears no policy objection to those that are bargained. We make no finding as to the wisdom of any particular such agreement, but they do not appear to lead to excessive compensation and are matters of public record. Such is not the case with respect to managerial compensation. The Committee has found repeated instances of excessive compensation, secrecy, and board irresponsibility. Certain of these cases, including those at the Fulton County Economic Development Corporation and related entities, and the Greene County IDA have caused serious public controversy and may be under scrutiny by other government agencies. Payments to authority employees in some cases rise to the millions of dollars, the explanations as to why they are necessary are sometimes bizarre, and board members appear surprised by their extent. It is important to remember that in all these cases, authorities and LDC's are being used to transfer public assets into private hands. Generally title to publicly owned real estate that seems to have little value is transferred to other public entities, and eventually ends up in private hands. The increased value of the property is either left in those private hands, or in one of the public entities. It is that increased value which has been given in the form of “bonuses” or contingent compensation. It is clear that contingent compensation practices present a serious danger to the public interest. It is not just that the compensation is excessive, it is that the increase in value of a public asset should be left in the hands of the taxpayer whose property it was originally. There is legislation dealing with this problem which should be enacted quickly. (A.11461) Mandate Debt Management and Reduction Plans In light of recent events, it has become clear that the mandatory imposition of debt management and debt reduction practices for all public authorities will lead to reduced waste and abuse. These public plans are necessary not just to reduce public indebtedness, but to assure that when new debt is issued, it will be both necessary and acceptable to the public and markets. We have recommended legislation that would mandate debt management and reduction policies for all public authorities. Increase Funding for the ABO The important reforms in PARA that are beginning to be implemented will collapse if the ABO does not receive the funding it needs to carry them out. We emphasize that the ABO is funded by public 2

authorities themselves, not by taxpayers, and that it is poised to save the state billions as it uncovers wrongdoing, downsizes the system, and makes all authorities more efficient. The ABO has been designed and approved for a staff of about 30. It currently employs only 7 persons. It should be budgeted for a staff of at least 15 in the next fiscal year. This recommendation is shared by the ABO itself and the Millstein Task Force. The ABO has recommended that increased revenue may be achieved by including the estimated 185 LDC’s in the existing assessment of all public authorities. It also recommends that LDC’s be subject to a Bond Issuance Charges (BIC) for the billions of dollars of debt they issue each year. We concur. End Evasion of PARA and Other State Laws Over the last years, a disturbing trend has developed across the State. A spate of not-for-profit corporations have been created at the behest of local governments at the active direction of leading law firms. These NFP's are providing services traditionally offered by governments themselves. We believe there are dozens of them in New York City, suburban and upstate communities. They are often described as economic development entities, or as ways of privatizing and reducing the cost of government. There is little or no evidence to support these claims, but, according to testimony from ABO Director David Kidera, a cottage industry has developed that is fraught with unanswered questions. What is most remarkable is the regular assertion by these entities that they are not covered by state laws, including PARA and PAAA. We have investigated a number of these including the Fulton County Economic Development Corporation and the M3SLDC in Monroe County. They assert that they are not bound by state laws on procurement, disclosure and reporting, lobbying, MWBE and many other areas of law. Two areas require consideration. First, a variety of laws that protect the public interest may not apply to these NFP's. Take the specific cases of procurement, lobbying or MWBE laws. Attorneys for the Monroe County entities assert that these state laws do not apply to them, while insisting that they abide by them as a matter of internal policy or local requirement. The NFP law was created knowing that many laws regulating government activity would not apply. It was simply not contemplated that fundamental public services would be transferred to them and necessary public protections lost in the shuffle. We recommend amending Section 1411 of Not for Profit Corporations Law to restrict the ability of a local governments or public authorities to use the NFP law to provide government services without legal protections, and to tighten or clarify the public purpose for which a local development corporation can be incorporated. We also recommend a thorough review of state laws that do not cover LDC's and NFP's and should be extended to them, and that local governments or public authorities should be required to notify the ABO when they create an LDC. This will assure that public services are provided by public, transparent and accountable entities. The second area of concern is the assertion by some LDC's that they are not covered by PAAA and PARA. This has been the subject of litigation, generally resulting in determinations that PAAA and PARA are applicable. But these assertions continue, sometimes in completely unreasonable and unacceptable form. The continuing assertion by the Fulton County EDC, for example, it is not covered is legally nonsensical. (The issue has been explored in the Committee's recent investigation of the FCEDC). PAAA and PARA contain language, which among many other criteria, make an entity subject to these laws if it was “sponsored” by a local government. That broad and inclusive language was drafted to cover entities that were intended to or actually did, deliver a public service or dispose of public property, receive public support or engage in efforts to assist a government purpose or function. The FCEDC “bonus” payments are an example of the inevitable consequences of the secrecy and 3

unaccountability that such entities exhibit when they ignore the requirements of state law. We believe the existing statutory language is broad and clear, and needs no change to require these now rogue entities to obey the law, and so far the courts have agreed. We have no objection to review and change of that language as long as such changes remain at least as inclusive as the existing language. Improve Enforcement of PARA The ABO is a new organization, with respect to its enforcement powers. It has done a remarkable job of implementing the reporting requirements of PARA. It is understaffed and underfunded. That being said we believe that the ABO has not shown sufficient energy and decisiveness with respect to enforcement of the law when faced with potential violations. We recommend that the ABO vigorously assert its enforcement powers, and make them known to all public authorities. Effective enforcement of PARA will also require that the ABO team up with existing law enforcement entities, like the Attorney General and the State Inspector General, to ensure that after referral from the ABO any alleged wrongdoing is properly investigated and remedied. The Millstein Task Force has recommended that the Office of the Attorney General and the State Inspector General designate investigators and lawyers to assist the ABO with enforcement of the law, believing that collaborative enforcement is the key to keeping with PARA’s statutory intent. We concur. Three small statutory changes would enhance the enforcement powers of the ABO: •Amend Section 2827 of Public Authorities Law to require the appointing authority to notify the ABO within 30 days if it intends to accept or reject the ABO recommendation that a board member be suspended or dismissed. •Amend the Public Authorities Law to grant the ABO the authority to levy fines or other financial penalties against authorities that are out of compliance with state law. Other states have adopted, as part of their Sunshine Laws, statutes that provide for fines up to $1,000 for violations, such as not submitting their certified financial audit report. We believe that NYS regulatory agencies such as PSC or the Insurance Department have similar authority. •Amend the Public Authorities Law to prevent public authorities from receiving state funds if they are out of compliance. Some states withhold state funds when an entity that receives tax payer money is non-compliant with state law. The ABO should create a delinquent list that all agencies must review and comply with when granting funds to public authorities. Expand and Clarify the Fiduciary Duties of Board Members The Millstein Task Force has three recommendations regarding the fiduciary duty delineated in PARA: 1) Amend state law to provide for a fiduciary duty owed by an appointing entity. 2) Educate appointing entities in the same manner as now done for board members. 3) Rigorously enforce ABO recommendation for removal for breach of fiduciary duty The Millstein Task Force also recommends that the ABO issue additional policy guidance on the 4

obligation of board members to actively evaluate the management of a public authority, in particular proposals submitted by senior staff to the board for approval. We concur in these recommendations. Require Public Authorities to Implement Risk Management and Oversight The Millstein Task Force recommends that the ABO conduct a thorough analysis of all public authorities related to risk assessment and risk oversight policies, and develop rules and regulations for the implementation of risk assessment and management procedures, using the recent federal legislation and SEC regulations as models. We concur in these recommendations. Amendments to PARA to Streamline Reporting Requirements, and ABO Board of Directors We have recommended a series of technical changes to streamline reporting requirements, to provide for vacancies, and to create an ABO Board of Directors, as contained in A.11223. An ABO Board of Directors would provide needed reviews of ABO activities. The Millstein Task Force has recommended, in legislative form, a slightly different type of board of directors, called an ABO Council. The Council would be a group of individuals with expertise in areas related to public authorities who can provide advice and consultation to the ABO on all matters related to PARA implementation. The Council would also be able to provide support in the ABO’s effort to secure additional funding and staffing as well. It also deserves serious consideration. The Millstein Task Force has also recommended renaming the Authorities Budget Office the Authorities Oversight Office. The Task Force believes that the name “ABO” does not reflect the actual powers of the office, and should be changed to more accurately convey its true purpose. Conclusion: The Continuing Public Authority Crisis The reform of state authorities is well and truly begun. Transparency has already dramatically increased. Oversight by the Legislature, the ABO and most recently by the State Comptroller is regular and effective. Authority behavior has already improved. These accomplishments are fragile. If the Governor and Legislature undermine the authority of the ABO, if adequate resources are withheld, if the ABO persists in its timidity in the face of wrongdoing, if state and local authorities continue to seek to evade PARA and other state laws, then the system will revert to its incarnation as a series of “Soviet-style bureaucracies.” The recommendations contained in the Report will go far in preventing that outcome. But a larger problem remains unsolved, and lands squarely on the desks of the new Legislature and new Governor. Historically, authorities have flourished for good and bad reasons. They became vehicles for the provision of public services, for the insulation of elected officials from politically sensitive decisions, and for the issuance of public debt outside of existing legal requirements. But they also became vehicles for the transfer of billions of dollars of public wealth into private hands. It is this latter phenomenon which remains out of control. The State Constitution has provisions to prevent such transfers, including the gift and loans provision and the debt provisions. With the support of Governors, Legislatures and the Courts those protections have been eroded. In some areas, judicial 5

erosion of the constitutional protections was a response to widely accepted arguments of necessity. There was a need for revenue backed financing, while the Constitution permitted only full faith and credit debt, and for public/private cooperation and new financial strategies that fell afoul of previous Constitutional doctrine. The courts responded. But the massive transfer of public property into private hands that resulted was not foreseen and is not justified. It has not been accompanied by commensurate public benefits. Public authorities became the vehicle for such transfers, be they publicly funded sports facilities by IDA's, or an Empire Zone program run by ESDC, or university construction using eminent domain powers, or distribution of the public's below-market-value electricity and real estate, state authorities have been giving away public assets and receiving little in return. To be sure, the rhetoric of job creation and economic development is powerfully expressed by elected officials, authority leaders and private sector beneficiaries of these transfers. But in the end the State has failed to protect its assets and interests. In an era when government is instructed to behave more like business, the failure to receive value for its investments is a crisis that can no longer be ignored. Why, for example, does ESDC refuse to seek an equity interest in entities in which it invests funds? Other sovereign wealth funds, including TARP, have learned well that public funds need the same protection and return as private funds. Why do authorities fail to assure adequate wage levels for jobs created with public funds? Why is there no effective way to measure and monitor job creation? What criteria are used to hand out tax preferences and reductions, and what is their total cost? As state government grapples with the cost of providing essential services, and reduces them, state leaders need to address and answer these questions. It is the great, unaddressed next step in authority reform.

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