December 8, 2004
Testimony of Edmund J. McMahon before the Senate Commission on Corporations, Commissions and Authorities
Senior Fellow for Tax and Budgetary Studies
Manhattan Institute for Policy Research
Good morning, Senator Leibell, and thank you for this opportunity to testify today.
My name is Edmund J. McMahon, and I am senior fellow for tax and budgetary studies at the Manhattan Institute for Policy Research. The Institute is a non-partisan, non-profit think tank, based here in New York City, whose mission is to develop and disseminate ideas that foster greater economic choice, opportunity and individual responsibility.
To begin with, I’d like to compliment the Senate and this committee for making what is clearly a serious effort to begin tackling one of the most important fiscal and managerial issues facing our state today. Public authorities are responsible for delivering a wide range of services that are absolutely essential to the smooth functioning of our economy and our everyday lives – including much of our power supply, our road system and our mass transit.
State-level authorities alone have more than $100 billion of bonded indebtedness. The taxpayers of New York are directly on the hook for more than a third of that debt, and implicitly could be liable for a good share of the rest – as we were reminded during the past week, by reports of the MTA’s call for higher taxes to help cover its skyrocketing debt service costs. There’s cause for concern that these authorities have mushroomed into a sort of self-serving shadow government, too far beyond the reach of public accountability.
But it’s important to recognize these authorities didn't spawn themselves. For the better part of six decades, a succession of Governors and Legislatures in New York have been in the habit of creating new authorities almost at the drop of a hat – often for the thinly veiled purpose of circumventing debt restrictions and shifting often dubious project expenses outside the purview of voters and the glare of tax-supported budgets.
In light of this history, no one was surprised when the state’s knee-jerk response to the World Trade Center attack was the creation of yet another authority, the Lower Manhattan Development Corporation - even though the LMDC doesn't do anything that couldn't have been done just as well by any number of existing agencies.
And the beat goes on. Last year, the Legislature created five new state and local authorities, with seven more called for under bills proposed in 2004, several of which have passed.
Certainly, our public authorities should be subject to the same sort of improved corporate governance standards enacted by Congress in response to the corporate accounting scandals. Such governance provisions are among the strong points of the proposed “Public Authorities Accountability Act of 2004” (S.7292-A). The bill’s requirement for expanded disclosure by individuals lobbying authorities for contracts and other goodies is also a very good idea.
In general, I would suggest, the more disclosure, the better – and by “disclosure,” I would include a standard requirement that all financial statements, meeting notices, board minutes and other authority records be posted on the Internet. By the way, that goes for all of government in New York, not just authorities.
But I think it’s also important to recognize the limits of disclosure as a strategy for boosting accountability. By their very nature, authorities operate off-budget and at arms-length from elected officials. This means they are inherently less accountable than most of us would like. You can improve their governance structures and ethics standards, but if you push too hard to make authorities operate under the same rules as regular government agencies, you risk eliminating the added flexibility and independence that make them effective in the first place.
Given the structure of public finance markets, there is simply no getting away from public authorities. They remain the most efficient vehicle for financing public improvements that are supported by project-specific revenues – or, as Al Smith put it, for “getting work done expeditiously without taxing our people.” Nonetheless, public authorities should be viewed as a necessary evil, at best. Elected officials should be very wary of creating too many of them or endowing them with responsibilities or financial capabilities beyond those required to accomplish very specific tasks.
In this regard, I believe the Public Authorities Accountability Act of 2004 is a solid first step. It might be improved by incorporating a few more provisions in Comptroller Hevesi’s bill, which Sen. Leibell has also introduced. But, in my view, neither of these measures goes nearly far enough to address the underlying problems here. Those problems are: the sheer proliferation of public authorities in New York, rampant mission creep in public authorities (usually induced, to be sure by the Governor and the Legislature), and the growing mountain of debt for which authorities are responsible.
During the recent uproar over the favoritism shown to a would-be developer of land controlled by the state Canal Corporation, far too little attention was paid to the more fundamental question of why the Canal Corporation even exists to begin with. As you know, this entity is nothing more than the outgrowth of a fiscal gimmick -- the 1991-92 budget-balancing scheme in which the Thruway Authority “acquired” the entire Erie barge canal system along with stretches of the Cross-Westchester Expressway and I-84. This was the same period in which the state “sold” Attica prison to the Urban Development Corporation – which, despite its name and original mission, had already become the primary means of financing all new prison construction and rehabilitation.
Attorney General Spitzer has compared authorities to the off-balance-sheet entities used by Enron for hiding money or for making the parent company look good. In fact, this was true of our public authorities long before anyone had ever heard of Enron.
None of the pending public authority reform measures, other than Assemblyman Brodsy’s, would prevent a repeat of such fiscal abuses in the future. To my knowledge, no one in state government – with the exception, again, of Assemblyman Brodsky – has proposed any bill that would prevent you from repeating the early 1990s scam of raising money by “selling” more prisons to UDC, or more highways to the Thruway Authority. Given the size of next year’s state budget gap, I’m a little hesitant to even mention the idea in public.
Indeed, in a very troubling precedent, the Legislature last year invented a whole new way of exploiting public authorities: by voting to siphon $170 million a year from the sales tax revenue stream of the Local Government Assistance Corp. to allow New York City to float $2.5 billion in bonds through a yet another new public benefit corporation, which in turn was created for the sole purpose of stretching out four remaining years of Municipal Assistance Corporation debt for another quarter-century. All this will cost a total of $5 billion, to be paid by future generations of taxpayers all over the state. Incredibly, at least a half-billion of the resulting windfall has been used by the city to “reimburse” itself for MAC bonds redeemed a year ago.
Given the established precedents, the Court of Appeals basically threw up its hands and said it could do nothing to stop this sort of thing.
Earlier this year, Comptroller Hevesi’s office reported that there were at least 640 public authorities at the state and locals level. I’m told they’ve since adjusted the number upwards to over 700. Of course, many of these authorities exist merely as letterheads. Some are dormant. But each and every one of them – even the much joked-about Overcoat Authority – represent an opportunity for potential abuse in the future. No taxpayer with any knowledge of New York State’s recent fiscal history, or its current fiscal problems, can rest easy knowing so many opportunities for fiscal and managerial abuse still exist.
You won’t achieve real public authority reform unless you address the root cause of problem, which is the misuse of authorities as vehicles for reckless borrowing without voter approval or oversight. You will never bring public authorities under control unless you are willing to bring your borrowing practices under control. In short, real public authority requires real debt reform – and both must be constitutional.
In that spirit here are three more significant steps you can take to vastly improve the situation:
- Impose an immediate statutory moratorium on the establishment of any new public authorities or public authority subsidiaries. 640 – or 720, or whatever the actual number may out to be – is more than enough. An exception to this moratorium would be made for any local authority established pursuant to a bonding initiative that has been approved in voter referendum.
- Establish a Public Authorities Sunset Commission for the express purpose of identifying authorities that can be eliminated or merged. Part of the commission’s mandate will be to conduct an inventory of public authority assets that can be sold to the private sector or, less preferably, transferred to state government.
- Amend Article 10 of the state constitution to limit the number of authorities and stipulate that state and local authorities shall exist for a single, discrete purpose and shall issue bonds underwritten by project-specific revenues. This amendment must be accompanied by Article 7 amendments banning backdoor borrowing and requiring voter approval for all general obligation borrowing.
The proposed moratorium, I think, speaks for itself. The Sunset Commission I’ve described here would be a more focused version of an idea that appears in Comptroller Hevesi’s proposed reform bill – and would implicitly incorporate the provision of S.7292-a requiring subsidiary corporations to report justifying their existence.
By the way, if such a commission was ever formed and took its work seriously, the list of authorities ripe for elimination would be very long but would certainly include the following:
Battery Park City Authority: Including untapped development rights, the entire Battery Park City complex could be transferred to private owner-managers by sale or long-term lease.
Roosevelt Island Operating Corp.: Another Rockefeller-era development entity, albeit on a more modest scale than Battery Park, the RIOC should also give way to private management and operation.
New York Power Authority: In 2000, NYPA sold its two nuclear plants to a private operator. That leaves 17 generating plants and 1,400 miles of transmission line to go.
State of New York Mortgage Agency: In a time of low interest rates and more liberal financing standards backed by aggressive federal lending agencies, could someone explain why this relic of the 1970s still needs to exist?
New York Racing Association: NYRA is not actually an authority, but the next worst thing -- a private nonprofit corporation with a monopoly franchise over thoroughbred racing, which has predictably led to corruption and mismanagement. The franchise should be broken into regional pieces and competitively bid to private operators.
Off-Track Betting Corporations: Speaking of horse racing, the state's six regional OTB entities are notorious patronage mills with their own histories of inefficiency and mismanagement. They, too, should be privatized on a competitive basis.
And there’s plenty more where they came from.
In closing, I would like to highlight what I consider to be the single most important principle that should guide public authority reform. Recently, Mayor Bloomberg’s economic development czar was asked why the city was not holding a referendum on the proposed partial public financing for a new Jets stadium. His reply: “We don’t do that sort of thing in New York.”
I suggest it’s high time we started doing that sort of thing in New York.
Return more control of public indebtedness to the people of the New York State, through the ballot box, and we will get all the infrastructure projects we need – but only the projects we truly need, truly want, and can truly afford. In the process, the public authorities will steadily diminish in importance. This is the strongest accountability and transparency reform you can possibly contemplate.
Thank you again for the opportunity to appear today.