Reforming Public Authorities by Gotham Gazette Staff, Jun 19, 2006 Twitter New York's public authorities have long been considered a kind of shadow government in the state.Created by the government and operated for a public purpose, these authorities - ranging from the Metropolitan Transportation Authority to the Overcoat Development Corporation, are exempt from many of the rules and review under which government agencies normally operate buses. In 2005, the state enacted some measures to reform the authorities. But a report issued last month by the Commission on Public Authority Reform, known as the Millstein Commission after its chair Ira Millstein, said much more remained to be done. And some critics say even that panel did not go far enough. At a recent panel discussion, several experts discussed the problems with authorities and what could be done to fix them. Who's Watching the Authorities? by Alan Hevesi Authorities and Debt by Jo Brill New York's Debt Limits by Robert Lamb Getting Politicians to Act by Blair Horner WHO'S WATCHING THE AUTHORITIES? During the 2002 election campaign, the Metropolitan Transportation Authority said it had a balanced budget. Two months later, in January, 2003, when I took office as state comptroller, they had a $2.7 billion deficit. I thought that was pretty strange. The Independent Budget Office did an analysis (in pdf format) of the Metropolitan Transportation Authority. They said, in effect, "You can't have a $2.7 billion deficit; it's a phony. Worst case, everything collapses, you'll have a $900,000 deficit." But what got my attention was the MTA's response: The $2.7 billion, it said, is the gross deficit and the $900 million is the net deficit. I spent 18 years on the Assembly Ways & Means Committee and eight years as city comptroller and I had never heard of a gross deficit. This was from the public relations office. It was a phony beyond belief. We went to the MTA and demanded their books and records. We had a big tussle about it. We issued subpoenas, we made them produce records and material, we took them to testify. The end result is we found they cooked the books. They had a second set of books where they hid $512 million so they could get a fare increase. That increase was financially needed but they were timing for political reasons. Katherine Lapp, the MTA's the executive director, fired the budget director. We issued recommendations for budgeting to the MTA, and required a bunch of administrative procedures. We set up four-year projections, transparent budgeting, gap accounting -- all of the things that New York City had to do after its fiscal crisis. Those regulations are now in place. Questions of Corruption Another problem for the MTA is 2 Broadway. 2 Broadway is an office building the authority leases. It was a good idea: The agency would move out of its expensive mid-Manhattan headquarters, sell the building, sell the air rights and move down to the cheaper building at 2 Broadway. But they had to rehabilitate the inside of the new building. The cost of the rehab was $135 million. The cost today is $450 million. The $700,000 elevators will go for $6 million. Why? Corruption. The mob came in, they bribed MTA officials, and they ripped off the system. Four MTA officials have pleaded guilty and gone to jail. And some mob guy as well. And the MTA's $450 million cost? They don't have cash. So they're going to borrow to pay off the rehab costs for the building they can't use now. With interest to $450 million becomes $800 million. Anther example: The Canal Corruption, which is an offshoot of the Thruway Authority, held a no bid contract to develop the entire 520-mile Erie Canal. It's beautiful and it's got 1,048 miles of shore. The authority did a request to see if there were companies that wanted to build housing or commercial property along the canal. Thirty-six companies responded. Thirty-five out of the 36 never heard from the authority again. One bidder was brought in for his plan, the Alpine Residential Project, to build houses. A number of years later, they did a competitive bid for the multibillion-dollar Alpine Project. Because the law requires public notification, they put an advertisement of the bid on page 62 of the Contract Reporter, a $175-a-year newsletter. No one saw the ad, so the Canal Corporation sent a Xerox to the politically connected developer. He bid it and he won. He was the only bidder, and his bid price was $32,000. Richard Brodsky, a member of the State Assembly who is hero on these issues, commented that you can't buy a used bus for $30,000. That's the kind of corruption we're talking about. Some of the public authorities do wonderfully good work. For example, there's the Home Roswell Park Cancer Institute, a public authority. We did an audit of them. Every management measurement was terrific. The board was active, the procurements were right, the funds were reconciled, their cash flow - it was great. There are 740 authorities in the state. The biggest are like the Port Authority, the MTA, and the bridge authorities. And then a lot of smaller ones in local governments, industrial development authorities, housing agencies, and so on. No one is watching them. Number Two in Debt New York State is the second most indebted state in America. Our debt is going to kill us. We are currently $48.2 billion in debt. Obligations that have already been incurred but the bonds have not been sold will raise that figure to $56.6 billion by 2010. That does not include this current budget. We analyzed the budget and beat up the governor and the legislature for spending money that we don't have, then borrowing to meet the difference and digging a deeper hole for us. What the legislature and governor did was to add $10 billion more of state borrowing. We are second to California in debt. They have twice number of people we do. Three years ago we were ahead of California. The only reason they moved ahead of us was because their economy collapsed and Arnold Schwarzenegger got elected. Schwarzenegger borrowed $27 billion last year. With state and local debt combined, everyone in this room owes $2,509. Ahead of us is Alaska. Alaska has lots of debt. It's a big state and they build lots of roads and bridges. They spend a lot of money, and they have no people. So you divide their expenditures by no people, you get a high per capita. In New York, you divide our expenditures by 19 million people. Under the Constitution, that debt is supposed to go to the voters. Last November, you voted on the transportation and bond issue, which is good debt. Debt is good if you spend it for building and repairing. But of the $48.2 billion debt, the amount of debt that was actually submitted to the voters was $4 billion. Instead, a bunch of these authorities borrow money for the state - and the voters do not have to approve it. Limits on Borrowing We've got to get this under control. Somebody's got to be able to say to the Public Authorities, "Be independent and have your business model but this debt is not affordable." Now someone will say that authority debt is not state debt. But if the Thruway Authority can't pay off its bonds and goes bankrupt, who is picking up the debt? You are. We are. If the hospitals are going under because they can't pay off their debt, then the taxpayer is going to take this on. So you have got to watch the authorities. They have to be audited; they have to be reviewed. Somebody has to look at their contracts and be able to say no. Somebody has to look at their debt and say no. A Time for Reform Elliot Spitzer, good government groups and I introduced a 165-page Authority Reform Bill, including a commission to look at the authorities to see if we really need them. After all, there's an Overcoat Development Corporation. I don't know what they do. The governor was very reluctant to do any of this, but there was a reform movement. And we passed a bill that does some good, but was watered down. Originally, the bill created an independent budget office and an independent inspector general to follow the corruption and mismanagement in the authorities. The governor said, "The condition of my signature is they're not going to be independent." So now we have an inspector general who is appointed by the existing inspector general, who is an appointee of the governor. And we have an independent budget office that's no longer independent; it's a unit of the Division of the Budget. In other words, we're repeating what we have already. No independence. But a political movement is starting to bubble up to "fix Albany," to make reforms. A powerful coalition of the most sophisticated good government groups are involved. We need to fix the authorities, fix the debt, fix procurement, fix campaign finance, and fix redistricting. I've traveled around the state talking to editorial boards and the good government groups, and said, "I have a mission for you." Make every candidate, particularly statewide, commit to being a reformer and elect people who are sincere about that. This is our chance. This is our opportunity. We will fix this state. Alan Hevesi New York State Comptroller PUBLIC AUTHORITIES AND DEBT The Citizens Budget Commission where I work is a non-partisan good government group that, since its founding in 1932, has worked to influence positive change in the finances and management of New York State and New York City. About a year and a half ago, the Citizens Budget Commission formed a committee of trustees to look at problems associated with public authorities. Public authorities are important and do good work. But it was not hard to find problems, major problems. Authorities provide a business-like organization to do a discrete activity. They are great at taking care of major capital assets and of big public transit problems at airports -- big infrastructure things. They are great at managing capital assets. They also borrow for private organizations like hospitals and universities, so that those organizations can have access to lower cost financing. New York State's authorities are incredibly diverse in size, scope of operations and purpose. While the comptroller counts 740 authorities, we work with the number 583, the authorities that are not the subsidiaries of other authorities. Of these, a couple of hundred are housing authorities; over 100 are industrial development agencies. There are 44 that are little foundations set up at a SUNY campus to manage the faculty's fund. There are 50 transportation authorities. Public authorities can range in size from an annual operating budget of a few million dollars to $8.5 billion for the Metropolitan Transportation Authority. Why Authorities Borrow What kinds of borrowing do authorities do? One is "backdoor debt": They issue debt for governments -- not just the state government, but local governments too. That debt is backed up by tax revenue Authorities also issue debt for the projects that they have undertaken on their own. This is called project revenue debt. The third kind of debt is borrowing on behalf of private entities, most often for economic development purposes. In a report (in pdf format) issued earlier this year, the Citizens Budget Commission figured out the state government, New York's local governments and the authorities that those governments have formed owe a total of $227 billion. Out of that, $41 billion at the state level and $29 billion at the local level is backdoor debt. This is debt that is issued by public authorities but funded by the state and local governments. Better Budgeting We started to look at what information should be available for public authorities. Some things are easy to think of: financial reports, financial plans, the state of capital assets, what the authority plans to do in a given year and, once the year is over, how well they believe that they did it. The accountability act signed earlier this year does not require all the information, particularly on finances, that you would like to see. It leaves out the information on the state of capital assets, it leaves out performance measures that you would like to see. The accountability act does not specify that any particular agency, such as the comptroller or the budget office, put together a big picture. This is a big problem. The CBC should not be left to come up with that $227 billion figure. Some public entity should be in charge of this and should be making sure that the numbers can be prepared and that they can be aggregated. And some entity should be monitoring plans and how they are reported. Planning processes are up to the individual authorities. Some have a ten-year plan some have a seven-year plan -- it's hard to tell what is going on. The fiscal years are all over the calendar. When you see a fare increase when you see a power plant being sited, when you see economic development grants being handed out, you might wonder why the decision is timed that way. The advantage of an authority is to insulate it from short-term concerns. If you can't tell whether it'sworking, then there is something wrong. Backdoor Debt There is obviously more to be done. Take the problem with the backdoor debt. The good thing and bad thing about it are the same: It allows you to spread the cost of a project over multiple generations. Why is that good? Because people in the future are going to benefit and they should pitch in. Why is it bad? Because they are not born yet and so are not represented by the current elected officials. This is why New York's constitution provides debt limits for both the state and local governments. They cannot issue debt unless the voters approve it. The debt limits for the local governments are typically some percentage of public property value. With so much backdoor debt, clearly the limit is not working. New York's debt is one of the highest in the country. We believe that the debt limit should be based on a concept of affordability that should be calculated by an independent board on a yearly basis. That would the best way to rationally decide how much debt a local government or a state government can carry. The accountability act does not deal with that. Debt limits are all about state supported debt. Other kinds of debt also could use some work. Some project revenue debt is controlled by the public authorities control board, but much is not. Public authorities build things that matter to our overall quality of life, but their plans are not integrated with the state's plan for capital development. You would like to think that everybody who is building and borrowing money is working together but that's not the case. So we believe that, if a public authority wants to borrow from the public and repay that debt out of project revenues, fine, but let the board decide whether it's a solid financial decision. And that project should be part of a long-term capital plan that the governor's office and the division of the budget have the opportunity to look at. The last of kind of debt - borrowing on behalf of private entities or conduit debt -- is handed out rather cavalierly. It could be subject to a more competitive process that would also help also keep neighboring industrial development agencies from competing with one another to give the biggest tax break. Some of that private conduit debt is issued on behalf of hospitals. At the same time the governor's commission is deciding which hospitals are going to close, those same hospitals are borrowing money through the dormitory authority to build new capacity. That also needs to be fixed. --Jo Brill, director of State Studies, Citizens Budget Commission CRONYISM AND DEBT Two elements are crucial to the debate on authorities. One is independence. Without independence, you do not get reform; you get the governor appointing literally 80 percent of the directors of these different authorities. As a result, you get either cronyism or people who are not trained and knowledgeable about the tasks that these authorities are taking on or the debt burden that they are imposing. The second is debt. The amount of debt imposed by authorities is three to four times more than the amount the state and city are imposing. That is because the state and city are only allowed to issue debt that the voters pass. As a result, they are not able to issue enough debt to do things like build hospitals, bridges, tunnels, etc. Therefore, this is done off budget by authorities. The need for cost reduction, the need for fiscal responsibility, has been pushed aside, not just in New York but across the United States. The entire United States in the 1920s and 1930s moved from debt paid by tax to debt paid by user fees. In New York City, they required people to pay a water and sewer fee. Those are user fees. Likewise with bridges and tunnels, the people who use them pay for them. The user fees would be set by authorities and the authorities would have no supervision and no control. The problem is that the total amount of debt for all of these public authorities is so large that they are crowding out each other, and nobody is taking control of the debt burden on us now and on your children or grandchildren. This debt will escalate into the future. --Robert Lamb, Clinical Professor of Management, NYU Stern School of Business GETTING POLITICIANS TO ACT Until about a week ago, I was trying to figure out how to discuss advancing an issue - public authorities reform - that I thought was dead. Last year, the legislature acted incompletely on authorities. Nevertheless they acted and that's the way it works in Albany. You get one bite at the apple. There was no interest, there has been no action in the area of authority reform in Albany, because they did it last year. Now the Millstein Report comes out with a list of legislative recommendations. I'm not going to go into detail, but let me give you my best case approach to this issue. The problems that we have with the authorities occurred because no one has been watching. When people don't watch there is mismanagement and corruption. That leads me to my tactical recommendations. The legislators tell me that they're not hearing about reform back in their districts, as they were last year and they wonder if they are off the hook. Now clearly they don't believe this, because all of the candidates running for statewide office are tripping over themselves to position themselves as reformers. They know that the public is still unhappy with Albany, but they feel they have done enough. So there are two things we have to try to do. First, we need to get a focused legislative rule on the issue of authorities reform. And the obvious place to go is that the so-called independent budget office they created last year that is not independent. It is just another creature of the governor, a governor who has been in office the last 12 years while all this mismanagement and corruption has been occurring. Clearly, as reformers, we want an independent budget office. Ira Millstein, the governor's appointee, says the same thing. So, go back to your elected officials and say, "As elected officials, where have you been monitoring the authorities of New York State? Now you can show how concerned you are by acting on the call for creation of an independent budget office." These problems with the authorities have been festering for a long time, and nobody has been paying attention. So focus on one thing, they didn't do the job, they didn't finish last year. But if they don't do anything, which is likely, it sets up a question that every incumbent should be asked: "You've been an incumbent a long time, where were you when all of these problems happened?" An almost Caponesque list of corruption has occurred in the State of New York. Where has everybody been? And what will you do to be different? Every gubernatorial candidate should be asked the same thing. For Republican candidate John Faso: "Where were you in the Assembly for 16 years? What are you going to do differently?" For Eliot Spitzer: "You have been attorney general for eight years, and what are you going to do differently?" Politicians are human barometers, they respond to pressure. --Blair Horner legislative director, New York Public Interest Research Group Â Tweet Editor's Choice With a Smirk, Bharara Diagnoses New York Corruption Problem Public Conversation on New Veterans Department Begins The Evolving Definition of Transparency Comments Comment(s) The comments section is provided as a free service to our readers. Gotham Gazette's editors reserve the right to delete any comments. Some reasons why comments might get deleted: inappropriate or offensive content, off-topic remarks or spam.