Public Authorities in New York State Citizens Budget Commission April 2006 Public Authorities in New York State FOREWORD Founded in 1932, the Citizens Budget Commission (CBC) is a nonprofit, nonpartisan civic organization devoted to influencing constructive change in the finances and services of New York State and New York City. During 2003 the role of public authorities in providing state and local services became a controversial issue, in part due to studies and investigations completed by the State and City Comptrollers and by legislative oversight committees. While these studies were useful CBC was concerned that the attention was focused too narrowly on what might be atypical abuses rather than the more significant long-run issues and broader perspectives, including a recognition that public authorities with appropriate controls have and continue to serve important public objectives. The leadership of the CBC therefore decided early in 2004 to initiate a study of this important topic. At the invitation of the Commission’s chairman, H. Dale Hemmerdinger, we agreed to lead the ad hoc Trustee committee that would oversee this effort. The following Trustees volunteered to join this research committee: Paul Alter, Paul Bader, Paul Balser, Stephen Berger, Kenneth Bond, Lawrence Buttenwieser, Herman Charbonneau, Stephen DeGroat, Douglas Durst, Roger Einiger, Bud Gibbs, Kenneth Gibbs, James Haddon, John Hallacy, Walter Harris, Fred Hochberg, Deborah Jackson, David Jones, Jerome Katz, Eugene Keilin, Walter Kicinski, Peter Kiernan, Bill Lambert, Andrew Lynn, Robinson Markel, Steven Polan (Co-chair), Hector Prud’homme, Alfredo Quintero, John Rhodes, Edward Sadowsky, Deborah Sale, Richard Sigal, Emanuel Stern (Co-chair), Kevin Willens, and Nancy Winkler. The Committee met eight times. The sessions were devoted primarily to reviewing materials developed by the CBC staff, but also included a meeting with State Comptroller Alan Hevesi and his staff and an informal conversation with several chairs of authority boards who agreed to share their perspectives with us. It is important to note that many of the Trustees involved in this effort have considerable expertise in the topic developed through extensive experience with public authorities including serving in leadership roles and working with them on financial transactions. This report was approved by the Committee at its final meeting. Shortly after the CBC created our committee, Governor George Pataki appointed the New York State Commission on Public Authority Reform with Ira Millstein as its chairman. Mr. Millstein, who also is a Trustee of the CBC, had already been active in helping the Governor with governance issues related to public authorities. He did not participate in this Committee’s deliberations; however, the CBC President, Diana Fortuna, serves as a member of the Millstein Commission, and the CBC Committee benefited greatly from shared information and analysis. On behalf of the CBC, we thank Mr. Millstein for his cooperation and congratulate his Commission for its work, which is expected to result in a report later this year that is likely to provide additional valuable recommendations for making better use of public authorities in New York. This report was prepared by Charles Brecher and Jo Brill. Brecher is the Research Director and Executive Vice President of the CBC, and he is a Professor of Public and i Public Authorities in New York State Health Administration at New York University’s Robert F. Wagner Graduate School of Public Service. Brill is the Director of State Studies at the CBC. They benefited from the research assistance of three Wagner School graduate students – Alexandra Simon, Eric Friedman, and Janine Murphy. Selma Mustovic, a Senior Research Associate at the CBC, prepared the debt affordability analysis presented in Appendix A of this report. Members of the staff of the State Comptroller helped by providing data on state and local debt and guidance in its interpretation and by reviewing a draft of the final report. Individuals from the Executive and Legislative branches also provided informal advice and feedback. We thank all who contributed to the development of this report. Steven Polan Emanuel Stern April 3, 2006 ii Public Authorities in New York State TABLE OF CONTENTS INTRODUCTION............................................................................................................. 1 OVERVIEW OF AUTHORITIES IN NEW YORK..................................................... 3 Accountability................................................................................................................. 4 Purpose............................................................................................................................ 7 Scale................................................................................................................................ 9 PROBLEM ONE: Misuse of the power to incur debt ................................................. 10 Background ................................................................................................................... 10 New York State and its Authorities .............................................................................. 12 New York City and its Authorities ............................................................................... 16 Other Local Governments and Their Authorities ......................................................... 19 Authorities with Mixed Accountability and a Summary.............................................. 22 PROBLEM TWO – Insufficient Oversight and Coordination of Project Revenue Backed and Private Conduit Borrowing....................................................................... 24 Inadequate Advance Review......................................................................................... 24 Limited Coordination with State Capital Planning....................................................... 25 Limited Guidelines for and Coordination of Conduit Debt.......................................... 26 PROBLEM THREE – Insufficient reporting to support accountability................... 28 What Should We Know?............................................................................................... 28 Current Reporting Requirements .................................................................................. 30 Current Reporting Practices.......................................................................................... 35 Summary of Significant Reporting Problems ............................................................... 38 PROBLEM FOUR – Insufficient Independence in Governance................................ 38 HOW TO SOLVE THE PROBLEMS .......................................................................... 41 New Constitutional Limits on Debt .............................................................................. 41 Improved Oversight of Authority Project Debt and Conduit Debt............................... 42 More Effective Allocation of Private Conduit Debt..................................................... 44 Improved Accountability with Better Reporting .......................................................... 45 Better Governance through Greater Independence and Professionalism among Board Members ....................................................................................................................... 46 APPENDIX A.................................................................................................................. 49 Debt Affordability Analysis for New York City, 2004 ................................................ 49 APPENDIX B .................................................................................................................. 53 Debt Of Local Governments And Related Authorities: Case Studies .......................... 53 iii Public Authorities in New York State EXECUTIVE SUMMARY Background Public authorities play a major role in delivering public services. They supplement direct government agencies in three ways: · Provide a business-like organizational structure for public services that are financed primarily by user fees and whose capital investments are self-financed through bonds supported by user fees. · Provide a stewardship for major capital assets and make long-run investment decisions with some isolation from pressures of the electoral cycle. · Provide a mechanism for taking advantage of federal tax benefits for economic developme nt and other purposes that otherwise would be treated as private activities. Authorities are intended to strike a balance between political accountability and political independence. Unlike heads of direct government agencies, governing boards of authorities are expected to be more independent of those who appoint them, to make difficult and unpopular decisions outside the arena of elected politics, and to be accountable to the public indirectly through reporting, transparency in decision-making and long-run performance. New York State makes extensive use of public authorities. It has created 583 authorities, and they have created subsidiaries that bring the total number of entities to 740. They assist in a variety of important public services including, providing electric power, creating and maintaining bridges and highways, running mass transit systems, building and operating housing, financing higher education, and providing medical care. State officials, typically the Governor, appoint the majority