Public Authorities, New York’s Unfixable Wildcard

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Eye from Albany
April 2005

Public Authorities, New York’s Unfixable Wildcard
by Paul M. Bray

Public authorities are New York’s wildcard. We can’t live without them, but we surely can’t control them.

In this year of reform in Albany, public authorities have been a prime target as reflected by outspoken Assemblyman Richard Brodsky who calls them “Soviet style bureaucracies” for their tendency for secrecy and arrogance and State Comptroller Alan Hevesi who says they “are out of control”. Yet, it is hard to reform something we’ve come to dependent on especially when it doesn’t fit into the usual boxes. A recent conference organized by the Government Law Center at Albany Law School called public authorities the “fourth branch”, but no one at the conference wanted to given them that level of stature.

What do we know about public authorities besides that they are unsupervised? In general, they are good for developing public assets whose development and operation can be paid for with user fees, when development is intergovernmental and unified entity is necessary and/or when long term management of a public asset like the New York State Thruway is needed. It can usefully separate to some degree public responsibilities from the political process.

The modern public authority dates from 1921 when the Port Authority of New York and New Jersey was created to coordinate the development of port facilities between two States in the Port of New York. By 1938 there were 33 authorities mostly “set up to build or operate or submit plans for the acquisition of bridges, tunnels, parkways and parks, or undertake other construction projects”. They were self-sustaining organizations developing and paying for public assets through revenues there from like bridge tolls. Robert Moses, the Power Broker, figured out how to use revenues generated by public authorities to undertake far flung development and park making across the State.

There was rapid growth of public authorities under Governor Rockefeller who sought the means to solve social objectives like providing better housing, schools and health care and cleaning our rivers. These projects were not self-supporting and required subsidy by government. The result was the creation of authorities like the Urban Development Corporation, the Metropolitan Transportation Authority and the Housing Finance Agency.

The courts allowed this to happen by opening the door to what attorney Kenneth W. Bond terms “synthetic tax supported debt without voter approval or recognition of constitutional debt limits”. John Mitchell who went on to become Attorney General under President Nixon designed the approach of attracting borrowers by using the “moral obligation” of the state to guarantee the repayment of debt. In other words, the legislature would be on the hook to pay for it. We are currently in another generation of public authorities, as government is getting increasingly dependent on authorities for day-to-day operating funds. The state is using the bonding ability of public authorities to refinance or stretch out state obligations, to borrow on future payments like the tobacco payments the state is to receive from tobacco companies and even to borrow to finance legislative member items. At the local level like the city of Albany, the Mayor uses authorities like the Water Board to keep some basic city expenses off the city budget and have city residents pay for water through fees rather than through their property tax.

Now we have at least 733 public authorities of varying strips and shapes from bi-state authorities: major state authorities including some like the Urban Development Corporation that has numerous subsidiaries and many regional and local authorities. State Comptroller Alan Hevesi reports that “As of March 31, 2004, the level of outstanding State-funded authority debt had increased to an estimated $43 billion (nearly 90 percent of total outstanding State-funded debt). In 1985, approximately 60 percent of total State-funded debt was attributed to public authorities.” In other words the state has become a drunk on the easy hooch of public authority debt.

Reforming public authorities means different things to different people. For some it is about debt reform, or curbing the almost unrestrained authority to issue synthetic tax-supported debt because of its argued adverse impact on the economy of the state and pocket book of the taxpayer. But as Ken Bond points out, “there is no wide-spread popular cry for debt reform”.

Another target of reform of public authorities is their governance. This comes, in part, from the recent congressional Sarbanes-Oxley law to clean up corporate governance in the wake of Exron, Global Crossing and other corporate disasters. Just like private corporations, there has been lack of transparency, accountability and a failure of directors of public authorities to realize their fiduciary responsibility to do the right thing. This led Governor Pataki to appoint Ira Milstein to lead a New York State Commission on Public Authorities made up of experts who have been asked to find a way to get boards of public authorities to think and act responsibly.

Internal governance reform is pretty arcane stuff and difficult to apply to public authority boards, many of whose members are appointed by the Governor or other public officials and who govern over a CEO they don’t appoint. A heated debate, for example, broke out at the GLC conference over who is owed the fiduciary responsibility: bond holders, the Governor or the public? It is not as simple as it is for public corporations where the responsibility is primarily to the stockholder. There aren’t stockholders for public authorities nor are they fully removed from politics given the appointment process. The MTA exemplifies this as members are identified in the press by who appoints them: the Governor’s votes, the Mayors votes and so forth. The Pataki administration is regarded to be particularly controlling of public authorities.

Finally, reform is taking the form of clamping down on currently free reign of public authorities. Assemblyman Brodsky is seeking to do this under legislation that creates an independent public inspector general over public authorities, an independent budget office to oversee finances, regulation of procurement lobbying for contracts by authorities and a process for reviewing and closing authorities that no longer serve a public function.

At the end of the GLC conference attorney Scott Fein who has represented public authorities articulately pointed out the public benefits that have come about through public authorities. He fears the current attacks on public authorities my only result in feeding public cynicism.

The track record of efforts to reform public authorities is dismal. In 1938 a report for a constitutional convention found problems with public authorities noting “that they were undemocratic and almost self-perpetuating; that they might impose a potential financial obligation on the State upon the failure of a public authority; and that they did not conform to the trend towards administrative integration of agencies in New York”.

The problems haven’t changed, only their magnitude has ballooned and new problems like reliance on authority generated debt for government operations have arisen. The one thing that has seemed to stay the same is the lack of a public cry for real reform of public authorities. Without that don’t expect government leaders to restrain the creation and use of public authorities that work so well for them, and fortunately so far in enough cases, for the people.