New York's 'Secret Government'

Adam SimmsSenior Research Fellow,

Hugh L. Carey Center for Government Reform

November 2008

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New York’s “Secret Government”

Public Authorities Are Out of Control and Threatening the State’s Fiscal Health

Published by theHugh L. Carey Center for Government Reform

at Wagner CollegeStaten Island, New York

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The Hugh L. CareyCenter for Government Reformat Wagner College

Dr. Seymour P. LachmanDirector

The Hugh L. Carey Center for Government Reform at Wagner College conducts non-partisan studies of state government and proposes ways to improve legislative and administrative effectiveness.

Wagner CollegeOne Campus RoadStaten Island, New York 10301

Tel: [email protected]

New York’s “Secret Government”

Public Authorities Are Out of Control and Threatening the State’s Fiscal Health

1

Introduction

Public authorities play an inordinate role in the lives of New Yorkers. They are quasi-governmental institutions, chartered by the state legislature for the purpose of financing and administering essential services upon which New Yorkers have come to rely for transportation, construction of hospitals and university campuses, low- and moderate-income housing, urban redevelopment, environmental protection, electricity, solid waste management, municipal parking garages, water treatment and distribution, and industrial development. There are so many public authorities in New York State that at the beginning of this century, state officials had lost count of their number. When tallies were undertaken between 2003 and 2006, estimates fluctuated from a high of 733 to a low of 292.

New York State relies so heavily, so completely on public authorities to provide the services that citizens of a modern industrialized society expect from their government that public authorities have been called “New York’s secret government.” Though New Yorkers are generally aware that these authorities exist, the label of “secret government” is warranted by the fact that a hallmark of American governance since the nation’s founding has been the principle of “no taxation without representation”; in other words, that taxes may only be levied with the consent of the people who pay them. But, starting in the 1960s, New York State’s elected officials seized upon the idea of using public authorities to raise money by selling bonds in order to finance a wide variety of projects and services. The attraction of this mechanism was that since the authorities are run by people who are appointed — not elected — to their posts, voters who are displeased with the debts undertaken by public authorities cannot hold elected officials responsible by, say, voting them out of office.

By late 2005, New York State’s debt amounted to $48.2 billion, which made the state’s debt burden the second highest among the nation’s ten largest states. All residents of New York — man, woman and child — carry a debt $2,509, over and above whatever mortgage, car or student loan and credit card balance they may owe. New York’s public authorities accounted for 92 percent of both figures, and yet the state’s voters had never been asked whether they wanted to go into debt to fund the authorities’ projects.

Another reason New York’s public authorities have been called the state’s “secret

New York State relies so heavily, so completely on public authorities to provide the services that citizens of a modern industrialized society expect from their government that public authorities have been called “New York’s secret government.”

New York State’s “Secret Government”

government” is that they have become financial mechanisms for the state, and the complexity of state finance is not a topic with which most New Yorkers are familiar, and is rarely one in which most have a day-to-day interest. When the news media report about public authorities, those reports are generally about an authority in the context of a scandal or controversy regarding one of its actions. Systematic reporting, much less systematic analysis, of the state’s network of authorities has been virtually non-existent. On the other hand, what systematic analysis exists and is readily available interested citizens is extensive — enough at least to fill the three three-inch three-ring binders used in preparing this monograph. But these analyses, which take the form of state government reports and policy papers by civic organizations, tend to be — to state it bluntly — dry reading, at best.

This monograph is an attempt to describe for an average, concerned citizen and reader the challenges public authorities pose to open, sound and responsible government in New York State. It seeks to bridge the gap between engaging but episodic news reportage and sound but often mind-numbing reports and studies with a narrative examination of a five-year effort to pass legislation to strengthen oversight of the state’s public authorities.

Parts I and II —E-Z Pass: “Kalikow & MTA cronies get passes for life — and YOU pay” and The MTA’s “Two Sets of Books” — focus on controversies surrounding the Metropolitan Transportation Authority (MTA), the state’s second-largest public authority and arguably the one that has the greatest daily impact on the greatest number of the state’s residents. The essential issues examined are the MTA board members’ understanding of their obligations as leaders of a public benefit corporation, and the extent to which public authorities are insulated from legal and political intervention in their decisions and actions.

Part III, From “Full Faith and Credit” to “Moral Obligation”: How New York’s Public Authorities Just Grew and Grew” examines the growth and development, from the 1960s onward, of public authorities as a mechanism by which elected officials discovered they could increase the state’s borrowing without asking voters for approval.

Part IV, “New York’s Secret Government” describes former State Comptroller Alan Hevesi’s role during 2003 in framing the issue of public authority debt as one requiring broad legislative reform.

Part V, Thrust and Parry: Setting the Parameters of Public Authority Reform, sets forth the polite but pointed political skirmishing during 2003-2006 between New York’s Republican Governor George E. Pataki and the state’s Democratic leadership over whether public authority reform would best be achieved through greater self-regulation or increased state regulation.

Part VI, Beyond Cosmetic Reform, presents the author’s consideration of suggestions to complete what has been, at best, an incomplete effort to reform New York’s public authorities.

This monograph is an attempt to

describe for an average,

concerned citizen and reader the challenges

public authorities

pose to open, sound and

responsible government

in New York State.

2

I.E-Z Pass: “Kalikow & MTA cronies get passes for life — and YOU pay”

As New York State’s Metropolitan Transportation Authority began laying groundwork late in the spring of 2008 to ready downstate residents for a round of fare and toll hikes only four months after a crazy quilt of increases had gone into effect, New York Daily News staff writer Pete Donohue burrowed through data obtained via a freedom-of-information request to find out how many E-ZPasses had been issued gratis to current and former board members of the public authority that operates and maintains bus, subway, commuter rail and bridge-and-tunnel transit for an estimated eight million people each working day.

What Donohue discovered was red meat for the Daily News, a tabloid newspaper known for its blue collar and middle-class white-collar populist stances on waste of taxpayers’ money. Donohue’s research hit pay dirt: 22 current and 37 former MTA board members had special E-ZPasses — in some cases, multiple passes —allowing them free passage through toll lanes on the region’s highways, bridges and tunnels.

The passes — actually, electronic boxes affixed to an automobile’s front windshield below the rearview mirror — are ordinarily issued by the MTA upon request to drivers who prepay a user-defined amount of money by credit card or check, which the authority enters in a central computer database. Each time a motorist drives a vehicle outfitted with the electronic box through a specially designated toll booth, a device electronically reads a number issued to the pass and automatically deducts from the user’s account the amount designated for that toll crossing. The E-ZPass system is quick and is credited with speeding up traffic through the toll sites. Drivers who use it no longer need to sit in line to make a cash transaction with a human toll collector. Nor do E-ZPass holders have to worry about whether they have cash on hand to navigate through the varying tolls charged at different crossings in the metropolitan region’s dense web of highways, bridges and tunnels.

An E-ZPass offers a convenient and arguably quick way for commuters to get to work and for truckers to deliver goods. But it is not cheap. For example, the round-trip passenger car toll over the Verrazano-Narrows Bridge, which connects Brooklyn with Staten Island, where Wagner College has its campus, is (at the time this monograph was written) $8.30 for drivers equipped with an E-ZPass, and $10 for drivers without one. (Residents of Staten Island, who have a special dispensation, pay a reduced rate of $4.98.) Thus, a weekly commute to Staten Island over the Verrazano-Narrows Bridge from Brooklyn, Queens or further east on Long Island costs drivers with an E-ZPass $41.50. A commuter who has to cross additional toll points to get to the toll-free Belt Parkway, which leads to the bridge, pays additional charges that are deducted from the pass. And none of these amounts include the cost of fuel and insurance necessary to get the vehicle from its driveway to the bridge’s toll plaza.

In all, Daily News reporter Donohue discovered that 57 current and former MTA board members were issued a total of 95 no-charge, sail-through-the-tollbooth passes. To illustrate possible reasons for issuing more than one pass per board member, Donohue

Donohue’s research hit pay dirt: 22 current and 37 former MTA board members had special E-ZPasses — in some cases, multiple passes —allowing them free passage through toll lanes on the region’s highways, bridges and tunnels.

The Hugh L. Carey Center for Government Reform • Wagner College

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looked up Peter S. Kalikow’s E-ZPass holdings. Kalikow, a New York City real estate developer, one-time owner of the New York Post, the Daily News’ tabloid arch rival, and immediate past chairman of the MTA board, offered a particularly easy target for populist tub-thumping. While chairman five years earlier, in 2003, Kalikow had presided over the largest single fare increase in recent memory, which generated not only groans from the commuting public, but allegations that the increases were unnecessary. The maladroit way in which the authority handled its press and public relations on that occasion had made Kalikow heir to Erich von Stroheim’s Hollywood nickname, “The Man You Love to Hate.”

“The multimillionaire developer,” Donohue explained, “gets the multiple electronic tags so he doesn’t have to switch them from car to car in his private fleet” of an estimated 45 or 48 cars, “many vintage or custom-made, and each worth a small fortune.” The Daily News article was accompanied with photographs of the former chairman and a head-on shot of one of those vehicles, described as a “Ferrari 612 Scaglietti, specially built for the superwealthy Peter Kalikow…” In high dudgeon, Donohue wrote, “And, get this, nobody thinks there’s anything wrong with it” (referring to the free passes, not Kalikow’s Ferrari). Asked to comment, Kalikow observed, “Everybody on the board serves for nothing … They do a lot of hard work and it’s a way of saying thank you.” MTA spokesman Jeffrey Soffin seconded Kalikow: “Our board members are not compensated and this is one very small way to acknowledge their many hours of public service.” 1

But with talk of another round of fare and toll hikes to make up for declining revenue from fees levied on real estate transactions in order to subsidize the authority’s $9 billion annual operating budget, rising fuel costs for operating its fleets of buses and commuter railroads, and sharply increased deficits in the next several years to pay debt service on its bonds, the Daily News’ story posed what had become a familiar question about the MTA: Its board members, who serve without direct monetary compensation, might be performing their duties as a “public service,” but were they truly serving the public in accepting this perk?

New York State Attorney General Andrew Cuomo’s office that same day answered with a resoundingly “no.” In all probability alerted to the story the Daily News was set to run, Benjamin M. Lewsky, deputy counsel in the attorney general’s department of law, sent James B. Henley, the MTA’s deputy executive director and general counsel, a stinging letter headed “Illegal Compensation of Board Members.”

1 Pete Donohue, “Kalikow & MTA cronies get passes for life — and YOU pay,” New York Daily News, May 27, 2008 [http://www.nydailynews.com/ny_local/2008/05/27/2008-05-27_kalikow__mta_cronies_get_passes_for_life.html]. Donohue’s “scoop” was actually nothing new regarding free passes for former MTA board members. An MTA statement, issued on December 6, 2004 in then-Chairman Kalikow’s name, said plainly: “The issuing of transportation passes to former board members is a long standing policy of the Metropolitan Transportation Authority in appreciation for the hard work, dedication, and the countless hours with no compensation these members gave to the betterment of New York’s transportation system.” [http://www.mta.info/mta/news/releases/?agency=hq&eng=041206]. The statement was available on the MTA’s Web site as of late summer 2008.


“And, get this, nobody

thinks there’s anything

wrong with it.”

4

By this letter, the Office of the Attorney General of the State of New York asks that you immediately terminate and rescind all free E-ZPass tags that have been provided to past and present MTA board members … [P]roviding these tags to board members is a form of compensation that violates a previously-issued formal opinion of the Attorney General and the MTA’s own enabling legislation …

A footnote in the letter noted that “compensation” was defined as including “the total consideration paid to an officer or employee for his or her service, including salary or wages and authorized fringe benefits.” Unstated was the fact that the federal Internal Revenue Service includes fringe benefits in its calculations of taxable personal income.2

Exactly how much was this fringe benefit — one which Kalikow’s successor as MTA chairman, H. Dale Hemmerdinger, acknowledged had been in place for decades, and unchallenged by previous state attorneys general — worth? Playing catch-up with its tabloid competitor, three weeks later New York Times reporter William Neuman noted that in the twelve months between November 1, 2006, and November 1, 2007, 45 current and former board members had used their free E-ZPasses 7,513 times. Since the one-way toll on most of the MTA’s bridges and tunnels was $4 during that period, Neuman calculated that the authority had given a free pass to $30,052 in toll collections. 3

Thirty thousand dollars was a proverbial drop in the bucket compared to the MTA’s projected $500 million ocean of red ink in 2008 and $700 million in 2009. Had it collected its board members’ forgiven tolls, the authority’s projected deficit crisis, which generated talk of imminent fare and toll increases, would not have been noticeably affected. But $30,000 would have paid for the annual toll charges of fourteen hypothetical Staten Island-bound commuters crossing the Verrazano-Narrows Bridge, and that implication apparently informed the attention the Daily News and The New York Times devoted to revelation of the MTA’s free passes.

The public authority, however, seemed unwilling to surrender its perks merely on the directive of the state’s chief legal officer. “Given the newly stated view of the attorney general, which is contrary to the M.T.A. position,” board chairman Hemmerdinger told The New York Times, “we are going to seek a declaratory judgment and allow a court to determine whether or not this constitutes compensation.” A day later, though, after behind-the-scenes discussions with representatives of the attorney general’s and Governor David Paterson’s offices, Hemmerdinger reversed course. Cuomo, in lower Manhattan that day, reportedly “applauded” the decision. But other comments, recorded in a news conference

2 “Attorney General Cuomo’s Letter to the Metropolitan Transportation Authority,” press release, Office of the Attorney General, May 27, 2008 [http://www.oag.state.ny.us/press/2008/may/may27b_08.html]. Pete Donohue, “Get ‘em off E-Z Street now, Andy warns MTA,” New York Daily News, May 28, 2008 [http://www.nydailynews.com/news/2008/06/02/2008-06-02_no_tolls_paid_on_24000_ezpasses.html]

3 William Neuman, “In Dispute on Free Transit Passes, It’s New York Agency vs. State’s Top Lawyer,” New York Times, May 29, 2008; William Neuman, “Putting a Price on Free Passes for M.T.A. Board Members,” New York Times, June 21, 2008. [All articles from The New York Times may be accessed on its Web site by using the author’s name and the article’s headline and date as criteria in the site’s advanced search feature.]

The public authority, however, seemed unwilling to surrender its perks merely on the directive of the state’s chief legal officer.


5

in front of his office, were stern: “You want people on the [MTA] board representing only the people of the state and not their own interests.” 4

By mid-June, when the MTA let it be known that it was considering another fare and toll increase, the E-ZPass flap appeared to be over. 5 But not quite yet. Hemmerdinger’s decision to revoke former board members’ passes, and to instruct current board members that their E-ZPasses, as well as free passes for use on subways, buses and railroads, could be used only while on authority business, had to be ratified at the board’s next meeting, scheduled for June 25. However, on June 18, a week before that session and on the same day as the MTA announced that “a burgeoning financial crisis” was forcing the authority to scale back most of the expanded subway and bus services it had promised the previous December, when it had imposed a round of fare and toll hikes, a prominent MTA board member revived the E-ZPass ruckus. 6

During an intermission between meetings of the authority’s bridges and tunnels committee and its Long Island Railroad and Long Island Bus committee, David S. Mack, the MTA’s first vice chairman and holder of six free E-ZPasses, told reporters that, as a Long Island resident, he rode the Long Island Railroad five to ten times a year. He then went on to intimate that without his free, authority-issued railway pass, he might not ride as frequently — or at all. “Why should I ride [the railroad] and inconvenience myself when I can ride in a car?” Mack reportedly said. MTA board members, he asserted, were “invaluable” to maintaining the authority’s level of service on behalf of the public served. “If you [the public] saw something and called it in,” Mack said, according to Times reporter William Neuman, “it goes right here,” placing his foot atop a wastepaper basket. “When the normal public calls it in, you know what happens with the bureaucracy, they don’t get the response that a board member would get.” The MTA vice chairman also wondered aloud whether, deprived of free E-ZPasses, board members would opt for the city’s free bridges linking Manhattan and the outer boroughs, rather than using the authority’s toll bridges and tunnels. Mack noted (and Neuman reported) “that he kept the telephone numbers of

4 William Neuman, “In Dispute on Free Transit Passes …,” ibid.; William Neuman, “M.T.A. Does About-Face on Free E-ZPass Travel,” New York Times, May 30, 2008. Three days later, the Daily News reported that the MTA had also issued 24,000 non-revenue producing E-ZPasses to various government agencies throughout the state, including the New York State Police, New York City’s police and fire departments; the city’s five borough presidents, and the Port Washington (Long Island) Police Department. In addition, more than a thousand retired MTA bridge and tunnel employees possessed free passes. Attorney General Cuomo’s office had 257 passes, which an unnamed spokesman indicated were “used by investigators on official duty, mostly upstate where there are no MTA facilities. The official said it makes little sense for a public authority funded by the state and city to bill state and city agencies, as it’s the same pot of money.” Pete Donohue, “No tolls paid on 24,000 E-ZPasses,” New York Daily News, June 2, 2008 [http://www.nydailynews.com/news/2008/06/02/2008-06-02_no_tolls_paid_on_24000_ezpasses.html].

5 William Neuman and Jeremy W. Peters, “As Revenue Falls, M.T.A. May Raise Fares Again in ’09,” New York Times, June 12, 2008.

6 William Neuman, “Subway Service Increase to Be Less Than Hoped,” New York Times, June 19, 2008.


“Why should I ride [the

railroad] and inconvenience

myself when I can ride in a car?”

6

the managers of the authority’s bridges and tunnels in his car and that if he saw a problem, he called them in from the road. He said he had instructed bridge managers to open an additional toll lane if there were long lines.” 7

Buried toward the end of the Times’ article was notice that Mack, described as “a wealthy real estate executive” who also served on the board of the Port Authority of New York and New Jersey, said that he was now paying for the type of E-ZPass used by the public. But two other MTA board members, Mitchell H. Paley, of Suffolk County, Long Island, and Francis H. Powers, of Staten Island, were reported to be less resigned to surrendering their perk. This raised the prospect that a revolt was brewing against MTA chairman Hemmerdinger’s decision to abide by the state attorney general’s opinion and to restrict board members’ use of their heretofore free, authority-issued passes. Benjamin Lawsky, who had issued the attorney general’s opinion on May 27, stoked the rumor as he hardened his office’s stance. “If the board rejects its own leadership,” Lawsky said, “we are prepared to enforce our position because no one is above the law.” 8

At that point, Governor David Paterson stepped in, and Attorney General Andrew Cuomo raised the stakes yet again. Paterson, citing the state’s threatened economy, declared that a decision by the MTA board to overturn its chairman’s decision “would demonstrate an utter contempt for average New Yorkers.” Cuomo threatened legal action to recoup funds the MTA had not collected from the E-ZPasses it had issued to current and past board members. He added, in comments to the press delivered outdoors on the steps of his Manhattan office, “To say you’d only use the facilities if they’re free is outrageous. You’re there to represent the users of the system. You’re not there for the perks, you’re not there for the free E-ZPass.” 9

If a revolt had been brewing, it quickly collapsed. Mack issued a written statement regretting his comments of the previous day and saying he would support restrictions on transportation passes issued to MTA board members. When the board met for its regularly scheduled monthly session on June 25, it voted 12–0 to support Hemmerdinger’s May 29 decision, although without acknowledging that its decades-long generosity might have been legally questionable. 10

7 William Neuman, “Move to Restrict Free Travel Passes Creates Rare Controversy for M.T.A. Board,” New York Times, June 19, 2008. Mack’s comment about “inconvenience” was first reported by the Daily News; see Pete Donohue, “MTA honcho: Why ride if it’s not free?” June 18, 2008 [http://www.nydailynews.com/ny_local/2008/06/18/2008-06-18_mta_honcho_why_ride_if_its_not_free.html].

8 William Neuman, “Move to Restrict Free Travel Passes Creates Rare Controversy for M.T.A. Board,” New York Times, June 19, 2008.

9 William Neuman, “Backing Off Free Passes at M.T.A.,” New York Times, June 20, 2008.

10 Pete Donohue, “MTA big really meant he’d rather pay than ride free!” Daily News, June 20, 2008 [http://www.nydailynews.com/ny_local/2008/06/20/2008-06-20_mta_big_really_meant_hed_rather_pay_than.html]; William Neuman, “M.T.A. Cuts Free Use of Passes by Its Board,” New York Times, June 26, 2008.

“To say you’d only use the facilities if they’re free is outrageous. You’re there to represent the users of the system. You’re not there for the perks, you’re not there for the free E-ZPass.”


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II.The MTA’s “Two Sets of Books”

Bashing the MTA is a downstate New York sport. Metropolitan area newspapers report on its doings with a gusto ordinarily reserved for tight baseball pennant races. That Peter Kalikow, a former chairman, was the focus of the Daily News’ first report about the MTA’s policy of issuing free E-ZPasses to past and current board members was no accident. A perfect storm of events five years earlier, in 2003, when Kalikow served as chairman of the MTA board, had established a baseline of skepticism toward MTA announcements that it needed further increases.

During December 2002 and January 2003, the MTA posted notices in city subway stations throughout New York City, informing riders that the MTA would hold 10 public hearings in February to consider fare and toll increases. The increases were necessary, the notices said, to close a $2.8 billion budget deficit projected for its 2003 and 2004 fiscal years. The authority had not raised fares or tolls since 1995; it was now proposing to raise bus and subway fares 33 percent, to $2 from $1.50, and bridge and tunnel tolls by 25 percent. It had avoided doing so by borrowing $10 billion on the bond market seven years ago to pay for repairing and upgrading equipment and for capital projects. Over the course of the past seven years, that $10 billion in debt had ballooned to nearly $16 billion, and the MTA estimated it would increase to $25 billion in a few more years. In the meantime, city and state aid for capital projects had dried up. As a result, the MTA now faced what financial analysts termed a structural problem: the cost of paying the interest on its accumulated debt was mounting at an alarming rate, and the authority had resorted to paying debt service charges from its operating budget revenues, such as surplus funds from bridge and tunnel tolls that had customarily been used for subsidizing bus and subway operations in order to keep those fares low. In sum, the MTA wanted fare and toll increases because its operating revenues were being bled by the demands of debt service. Reporting this scenario for The New York Times on January 17, 2003, Randy Kennedy likened it to “a rapidly rising payment on a credit card balance”: the only way the MTA could keep up with its debt payments was to increase its income and, absent renewed contributions from the city and state, that meant it needed to raise fares and tolls. 11

But even as commuters were absorbing the MTA’s announcement that a looming $2.8 billion deficit presaged fare and toll increases, New York City’s Independent Budget Office (IBO) was analyzing the numbers provided in the authority’s documents supporting the proposed increases. True, the IBO’s analysts reported, debt payment projections were rising; but the situation wasn’t as bad as the MTA said it was. The authority’s budget gap, the IBO concluded, was actually $951 million over the next two years, one third of the $2.8 billion the MTA had posted on subway pillars throughout the city.

Queried about the apparent discrepancy, the MTA’s budget director, Gary Caplan,

11 Randy Kennedy, “M.T.A. Faces Bigger Woes Linked to Debt, Study Says,” New York Times, January 17, 2003.


The MTA wanted fare

and toll increases

because its operating

revenues were being bled by

the demands of debt service.

8

replied that the $2.8 billion figure was valid, since, The New York Times reported, “[i]t simply did not take into account a series of cost-saving measures and a corporate restructuring plan that officials hope will result in significant savings over the next two years.” 12

The same day as The New York Times account appeared, MTA Executive Director Katherine N. Lapp testified at a New York City Council hearing. She informed legislators and the press that, indeed, the authority had revised its deficit projection downward for the next two years, from $2.8 billion to between $951 million and $1 billion. As her budget director had foretold, she attributed the new estimate to cost-cutting measures, which, she noted, had been published the previous November as part of the MTA’s budget documents. Questioned about the disparity in the numbers, she replied, “It’s the difference between looking at the gross gap and the net gap.” 13

In other words, it depended upon how one looked at the numbers. Still, only one number stuck in the riding public’s mind: $2.8 billion. It was the one the MTA had plastered on subway platforms, and the one the MTA had continually cited during its public forums in February.

Overall, the authority’s clientele, whose fares and tolls had last been raised in 1995, seemed resigned that the increases were a foregone conclusion. So confident was the MTA board that the increases would be approved that its chairman, Peter S. Kalikow, attended only two of ten public hearings. 14 Indeed, on the day the board was to meet to vote its approval of the increases, scheduled to take effect during the first week in May, New York Times reporter Randy Kennedy noted that the prospect of paying more for the MTA’s services had “largely failed to generate the widespread opposition that greeted previous increases.” 15

Yet the difference between the two sets of numbers in “the gross gap and the net gap,” as Katherine Lapp described to the New York City Council in mid-January, would soon come back to haunt the MTA. The authority’s complacency and the public’s resignation to fare hikes were shattered six weeks later when State Comptroller Alan Hevesi released an audit of the MTA’s financial records, which he had subpoenaed in February. Hevesi’s analysis showed that during the previous year the authority had had a surplus of $537 million, but had reallocated those funds to pay down debt in 2004, leaving a budget gap of $236 million for 2003. “If all the funds available to be used in 2003 were included [in the financial plan the authority released to the public in December 2003],” Hevesi declared in a statement released to the press, “the MTA would have shown a 2003 surplus of $83 million.” At the same time, New York City Comptroller William C. Thompson Jr. released an audit of New York City Transit, which concluded that the MTA subsidiary agency

12 Ibid.

13 Randy Kennedy, “M.T.A. Executive Clarifies Budget Deficit,” New York Times, January 18, 2003.

14 Clyde Haberman, “NYC: Rare Sighting: Transit Chief Facing Public,” New York Times, March 7, 2003.

15 Randy Kennedy, “Transit Increases Overview; Transit Authority Seeks Increase in Fares and Tolls,” New York Times, March 6, 2003.

In other words, it depended upon how one looked at the numbers.


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had on its books an unreported investment pool of $300 million, of which the public had not been informed during February’s fare-hike forums. Summarizing his findings for the press and public, Hevesi charged that the MTA had been operating, as New York Times reporter Kennedy noted, “two sets of books for its financial plans — one set made public and another for internal use only ….” 16

Prominently noted in the fourth paragraph of Kennedy’s report was this caveat: “The officials involved in the audit acknowledged that even if the [MTA’s] surplus had been used this year, the authority almost certainly would have faced a large gap next year and would have needed to raise fares, as expenses rose and revenues remained flat. But they said that the authority was manipulative and deceitful in the way it arranged its finances to make the problems look more immediate.” 17 Thus Hevesi acknowledged that the MTA faced a significant deficit that would justify fare and toll increases in 2004; what his audit questioned was whether those increases, due to take effect in eleven days, were necessary in 2003.

In other words, it was a judgment call, over which the MTA’s financial planners and its board differed with the state and city comptrollers. But in the battle for public attention, Hevesi emerged with the upper hand after headline and editorial writers transformed his initial statement about “two sets of financial plans” into “two sets of books.” The new description blurred distinctions between counting cash on hand and planning for the future; suggested financial skullduggery (although both Hevesi and Thompson acknowledged that neither the MTA nor the New York City Transit Authority had violated any statutes by presenting their financial reports as they had), and raised the issue of the degree to which

16 “Hevesi to Issue Subpoena to MTA for Financial Information: Demands Postponement of Fare Hike Vote,” press release, Office of the New York State Comptroller, February 19, 2003 [http://www.osc.state.ny.us/ press/ releases/feb03/21903.htm]; Daisy Hernàndez, “Hevesi Orders M.T.A. Board To Release Finance Data,” New York Times, February 20, 2003; James C. McKinley Jr., “Political Fight With M.T.A. Won’t End With Vote,” New York Times, March 6, 2003; Randy Kennedy, “For M.T.A., Bottom Line Is a Matter of Credibility,” New York Times, April 24, 2003; Tina Kelly, “Comptrollers Urge Changes to Make M.T.A. More Open,” New York Times, April 24, 2003; Randy Kennedy, “Hevesi Says M.T.A. Moved Millions to Simulate a Deficit,” New York Times, April 23, 2003. In fact, the phrase used in Hevesi’s press release was “two sets of financial plans, one public and one secret”; see “MTA Hid Half a Billion Dollars in 2002 Budget, Fare Increase Based on Misleading Information,” press release, Office of the New York State Comptroller, April 23, 2003 [http://www.osc.state.ny.us/press/releases/apr03/042303.htm]. See also: “Hevesi Gives Legislative Committee Copy of Metropolitan Transportation Authority’s Secret Document[.] Testifies on Proposed Reforms to the MTA,” press release, Office of the New York State Comptroller, April 29, 2003 [http://www.osc.state.ny.us/press/releases/apr03/042903.htm]; “Testimony by Comptroller Hevesi to Assembly Corporations Committee on April 29 Regarding Finances of the Metropolitan Transportation Authority,” Office of the New York State Comptroller, April 29, 2003 [http://www.osc.state.ny.us/press/releases/apr03/mta42903.pdf]; “Response to the April 29, 2003 Statement by the MTA,” press release, Office of the New York State Comptroller, April 29, 2003 [http://www.osc.state.ny.us/press/releases/apr03/042903a.htm].

17 Randy Kennedy, “Hevesi Says M.T.A. Moved Millions to Simulate a Deficit,” New York Times, April 23, 2003.


The new description ...

raised the issue of the degree

to which ... any of the state’s

multitude of public

authorities placed the

interests of the public at the center of its

decisions when exercising its authority to

collect, allocate and spend the

public’s dollars.

10

this public authority — or, indeed, any of the state’s multitude of public authorities — placed the interests of the public at the center of its decisions when exercising its authority to collect, allocate and spend the public’s dollars.

Hevesi released his analysis of the MTA’s finances on Wednesday, April 23; the MTA’s fare increases were scheduled to take effect eleven days later, on Sunday, May 4. On Thursday, May 1, a day after MTA Chairman Kalikow acknowledged at a breakfast of New York City business leaders that the authority “could have done a better job in the area of transparency, communicating with the public about our finances and the way we go about our work,” State Supreme Court Justice Louis B. York heard opening arguments in a suit brought by the Straphangers Campaign, a transit riders advocacy offshoot of the New York Public Interest Research Group, to stop the rise in subway and bus fares. Gene Russianoff, Straphangers staff attorney and spokesman, told The New York Times that “he believed the fare increase could be invalidated under New York state law because it was approved only after legally mandated public hearings in February in which the public relied on misleading and deceptive information.” The group’s suit therefore asked that the court find that the MTA’s financial plan for 2003 and 2004 had misallocated public funds in order to create what had seemed to be a deficit, and that the authority be ordered to hold a new round of public hearings that presented accurate financial numbers. 18

Defending the MTA’s actions before Justice York, the authority’s attorneys yielded no ground. Responding to Hevesi’s contentions that the MTA had manipulated its numbers to create the appearance of an immediate deficit, The New York Times reported the MTA told the court that “state law gave them no obligation to provide a completely detailed accounting to the public”; contended that “the public hearings were not meant to be a ‘working session’ with the public and added that the M.T.A. was not compelled by law to present ‘a financial plan it was not considering.’ ” 19

Thirteen days later, on May 15, Justice York ruled in favor of the Staphangers Campaign. York invalidated the fare increases and ordered them rescinded, stating that the MTA’s hearings in February had been “based on the false and misleading premise that the M.T.A. was in worse financial condition than it knew itself to be.” Calling the deficit cited by the authority “a fictitious gap,” he stated that the claim “had a chilling effect on the public, discouraging an open and complete discussion of the proposals and foreclosing the presentation of creative alternatives.” As a result, York concluded, these acts “undermined the public’s confidence in the M.T.A.”

Needless to say, the Straphangers Campaign was pleased. In 1995, the group had joined with the New York Urban League in an attempt to stop an MTA fare increase, arguing that the hikes were discriminatory because bus and subway fares had gone up by a higher percentage than commuter railway fares. That suit was unsuccessful. Eight years

18 Randy, Kennedy, “Attempt to Block Higher Fare Is to Go Before Judge Today,” New York Times, May 1, 2003; despite its designation, State Supreme Courts in New York are the lowest level and the entry level of the state’s judicial system.

19 Randy Kennedy, “Saying Public Was Misled, Judge Rescinds Transit Fare Increases,” New York Times, May 15, 2003.

The MTA told the court that “state law gave them no obligation to provide a completely detailed accounting to the public.”


11

later, the lead plaintiff in the new suit — State Senator David A. Paterson, of Manhattan — told The New York Times he was “happily surprised” by Justice York’s ruling. 20

York gave the MTA two weeks in which to rescind its bus and subway fare increases. But the victory ultimately proved illusory. A day later, the authority’s attorneys challenged the decision in the State Supreme Court’s Appellate Division. That action automatically put the two-week deadline on hold, and the fare increases remained in effect as the appeal was heard. 21

Motorists who used the authority’s bridges and tunnels fared better. Disappointed that Justice York’s ruling had dealt only with bus and subway fares, the Automobile Club of New York filed a petition in State Supreme Court for a temporary restraining order to block toll increases, due to go into effect on May 18. During testimony, Gregg M. Mashberg, an attorney for the Triborough Bridge and Tunnel Authority, another of the MTA’s subsidiaries, pointed to the cost burden of notifying the public that tolls would not be raised and then, at some time in the near future, notifying the public that tolls would be raised, costs which he estimated would total $3 million. Moreover, he contended, as The New York Times reported, the MTA’s bond ratings would suffer “if investors perceived that its ability to set toll increases was suddenly restricted in some way.” The Triborough Authority’s lawyers also argued that it was not legally bound to hold public forums before deciding to raise its tolls. 22

Justice Robert D. Lippmann, who presided over the Automobile Club’s suit, initially declined to order a temporary halt to the toll increases. But two and a half weeks later, on June 4, he, too, ordered the MTA to rescind its hikes, and criticized the authority in harsher language than had his colleague. Citing misleading information provided by the MTA to the public in order to justify the increases, Lippmann said the authority’s officials had “displayed a pattern of untrammeled arrogance and deception and disdain for the public they were obligated to serve.” Moreover, evidence introduced in his court demonstrated that “during the past few months, and probably years, the M.T.A. has been operating in a manner inconsistent with the legislative intent” of New York State’s Public Authorities Law. It was up to the governor, the comptroller and the legislature — not the courts — to provide “permanent remedies” for such “misconduct”; meanwhile, however, the court had authority to order the MTA to rescind its toll increases, based on the misleading information it had used to justify the increases. 23

The New York Times reported that an Automobile Club spokesman was “ecstatic” when queried about the ruling. But in this instance, too, ecstasy was short-lived. The MTA filed an appeal, and Justice Lippmann’s order was placed on hold pending review by the

20 Ibid. The Straphangers Campaign suit of 1995 is reviewed briefly in Randy Kennedy, “Attempt to Block Higher Fare…,” New York Times, May 1, 2003.

21 Randy Kennedy, “Transit Agency to Appeal Judge’s Order to Roll Back Fares,” New York Times, May 16, 2003.

22 Michael Brick, “Judge Refuses to Stop Increase In Bridge and Tunnel Tolls,” New York Times, May 17, 2003.

23 Randy Kennedy, “Judge Orders Toll Rollback At Crossings,” New York Times, June 5, 2003.


The Triborough Authority’s

lawyers argued that it was not

legally bound to hold public forums before

deciding to raise its tolls.

12

State Supreme Court’s Appellate Division. When the appellate division handed down its judgment on July 15, the MTA carried the day. The five-member judicial panel unanimously declared that the authority’s forecast of a $2.8 billion deficit had been a “salient, undisputed fact” at the start of the previous February’s public hearings, and were, therefore, not “fictitious,” as two State Supreme Court justices had mistakenly ruled. Moreover, the appeals panel observed, the MTA had complied with the state’s Public Authorities Law when the authority posted its public hearing notices: the notices had been printed using large, clear type, and the changes proposed were broadly described. The panel went on to declare: “While it would be desirable from the public’s perspective to have the M.T.A.’s budgeting process be completely transparent and open for detailed inspection and, perhaps, robust debate, such requirements would impose additional administrative burdens and costs.” In sum, the authority had complied with the letter of the law; any remedy requiring the M.T.A. to make greater disclosure of its finances at future public hearings “is a political decision for the Legislature to determine,” the panel stated. 24

Ten weeks later, on September 23, New York State’s Court of Appeals declined to review the State Supreme Court Appellate Division’s decision. The MTA had prevailed. Downstate New York’s riding and driving public may have felt deceived and ill-used by the transportation authority’s accountants, budget analysts, public hearing planners and board; but the courts, interpreting the letter of the law, found no law had been broken. The MTA’s fare and toll increases remained in effect, as they had throughout the lengthy appeals proceedings. In essence, nothing changed — including, as Times reporter Kennedy observed in July, when the State Supreme Court’s Appellate Division had handed down its decision, later upheld by the Court of Appeals, that “one thing has become clear: the almost unassailable power of the [MTA] under the state’s Public Authorities Law to determine how much money it needs from riders.” 25

The Metropolitan Transportation Authority is, in terms of its operating budget, one of New York State’s largest public authorities. But it is without doubt the most visible of those authorities and has more direct impact on the daily lives of more New Yorkers than any other agency of its kind. The MTA logo is emblazoned on every public bus and subway and commuter rail car, and prominently posted at every bridge and tunnel toll crossing it operates. Whenever there are long lines, delayed arrivals and departures or service breakdowns at its facilities, commuters and day-trippers alike know instantly where the fault lies, if not precisely who or what is to blame.

Yet familiarity is not the same as knowledge, and there remains vast confusion among New Yorkers as to what public authorities are and how they function. Much of this confusion stems from the term “public authority,” and from the visible trappings of how they are governed. Members of public authorities boards, like those of the MTA, may

24 Randy Kennedy, “Affirming Increase, Court Rules Fares are M.T.A.’s Call,” New York Times, July 16, 2003.

25 Randy Kennedy, “Effort to Void Transit Fare Increase Dies in Court,” New York Times, September 24, 2003; “Affirming Increase…,” New York Times, July 16, 2003.

Any remedy requiring the M.T.A. to make greater disclosure of its finances at future public hearings “is a political decision for the Legislature to determine.”


13

take their posts after being nominated by elected officials, undergo confirmation hearings by members of an appropriate legislative committee, and then receive the consent of the legislature. Portions of the boards’ meetings at which votes are taken may be open to the public and press. The boards — as in the case of the MTA, but not its subsidiary, the Triborough Bridge and Tunnel Authority — may be legally required to hold public forums when it proposes to increase user fees. Those fees, along with other dedicated state and local revenues, as well as direct subsidies voted by state and local governments, may underwrite a crucial portion of an authority’s annual operating budget. All of these arrangements tend to leave the impression that a public authority is a creature of the public and therefore answerable to the public. But, in fact, as reporting of the MTA showed in 2003 and 2008 — if the reporting is read carefully — vastly more authority is vested in a public authority than it is in the public.

Another name for the entity commonly known as a public authority is “public-benefit corporation.” That term is found in New York State’s Public Authorities Law, used virtually interchangeably with the term “public authority,” and is slightly more evocative of the true relationship between the entity and the public. The corporation (read also: authority) exists to benefit the public through services it was created to provide. The public is passive: it merely consumes those services, and has no legal right or power to determine or direct what those services are or the costs for providing or using them. Such rights and powers are vested in the entity’s board — and there are no shareholders.

If not the public, then who is a public authority’s/public-benefit corporation’s true constituency? The answer is: its bondholders. This would have been apparent to anyone who paid close and careful attention to reporting of the controversy over the MTA’s decision to raise user fees in 2003. Todd Whitestone, managing director of Standard & Poor’s public finance department, told The New York Times that devoting one year’s surplus to pay down future debt was not an unusual budgeting procedure among government agencies. “In fact,” he said, “I would say it’s a relatively prudent thing to do.” When he spoke to the newspaper, Whitestone was preparing to meet with the MTA’s financial and legal representatives regarding a rating for $500 million of municipal bonds the authority planned to sell in the coming month. 26 And as State Comptroller Alan Hevesi had demonstrated in his analysis of the MTA’s finances, the authority, indeed, had had a surplus on hand that could have carried it through 2003 without the need to increase its fares and tolls that year. But the MTA’s financial planners and its board chose to shift that surplus forward, thus creating a deficit for 2003, and to raise fares and tolls in order to pay down debt owed to bondholders.

Only by demonstrating that it could continue to pay the debt it already owed could the MTA continue to sell more bonds at the lowest possible interest rate available in order to raise funds to continue operating its transportation system. In determining its user-fee structure, the MTA’s first consideration was its ability to meet the needs of Wall Street’s bond market. The commuting public’s fees were a means to that end. Commuters who

26 Randy Kennedy, “For M.T.A., Bottom Line Is a Matter of Credibility,” New York Times, April 24, 2003.


If not the public, then

who is a public authority’s true

constituency? The answer

is: its bondholders.

14

used the system may have thought that their fees paid for its operation and therefore gave them a considerable voice when the authority set about determining the fares and tolls they paid. Certainly, the MTA’s legally mandated obligation to hold public hearings prior to its board’s voting for such increases conveyed that impression. The reality, however, is different, as decisions by the upper levels of the state’s court system made clear. Those decisions also made clear that if the commuting public wanted any remedies in the way the authority conducted its affairs, those remedies would have to be sought not from the courts, but from the state legislature. The problem with that solution is that the State of New York has become addicted to public authorities, and exerting control over their activities and finances presents hard choices that legislators, who must face voting taxpayers every two years, are loathe to make.


15

III.From “Full Faith and Credit” to “Moral Obligation”:

How New York’s Public Authorities Just Grew and Grew

New York’s first public authority was created in 1921: the Port Authority of New York. 27 Frequently referred to as “the Port of Authority,” it was formed to ensure uninterrupted financing in order to develop shipping and rail facilities in New York and New Jersey harbor region at the mouth of the Hudson River. Previous attempts to do so had limped along for decades because the financial scale of the undertaking was enormous and beyond the resources of the private sector. Political leaders in both states initially agreed to underwrite the project with legislative appropriations, but ups and downs in the economy, cost overruns and changes in political fortune in Albany and Trenton challenged the legislatures’ capacities to appropriate steady streams of revenue to keep the project on schedule. New York, in particular, was hampered by debt-limitation provisions written into its constitution in 1846, a product of prior experience in funding construction of the Erie Canal and railroads, which had created massive state indebtedness and taxpayer revolts.

Handing financing and administration to a public authority helped to solve these fundamental problems. The governor of each state appointed an equal number of members to set priorities and oversee development, and the authority was empowered to sell bonds to the public, to be repaid with revenues generated by fees for using the harbor’s facilities. Gone were worries that New York’s or New Jersey’s legislature — or both — might balk at appropriating funds and thereby throw development off schedule. Best of all, from the perspective of each state’s legislators, voters would have no grounds on which to accuse them of raising taxes, because funding for the port projects came from the nation’s private-sector bond market, not public coffers.

A decade later, Robert Moses became a savior to thousands of New Yorkers as the head of a host of public authorities created to leverage federal funds for public works projects. In The Power Broker, Robert Caro describes how banks and brokerage firms were at first reluctant to underwrite bonds for Moses’ Triborough Bridge, linking Manhattan, Queens and the Bronx. They were skeptical that the project could succeed financially, given its massive cost and constraints on consumer spending during the Great Depression. Doubt turned to enthusiasm, however, when motorists flowed through the bridge’s toll plaza in a seemingly endless stream, glad to avoid delays on East River barges that had heretofore ferried automobiles from one borough to another. In fact, so much toll money flowed into the Triborough Bridge Authority’s coffers that Moses discovered he could pay bondholders years before the bonds’ due date by refinancing the bonds through a new

27 In 1972, its name was changed to the Port Authority of New York and New Jersey, to reflect its bi-state governance and functions. For a brief outline of the development of public authorities in New York, see Public Authority Reform: Reining in New York’s Secret Government (Albany: Office of the State Comptroller, February 2004), 3-10. The principal author was Deputy Comptroller Margaret M. Sherman. (Hereinafter cited as Reining…) [http://www.osc.state.ny.us/press/releases/feb04/publicauthorityreform.pdf]


Best of all, from the

perspective of each state’s legislators,

voters would have no

grounds on which to accuse them of raising taxes, because

funding for the projects came from the bond

market, not public coffers.

16

bond issue. Holders of the initial bonds were delighted to get their money back early, and with interest; and banks and brokerages, weaned from their skepticism by the bridge’s steady flow of revenue, eagerly snapped up the new bonds. Delighted, too, were the city’s politicians and labor unions: Moses’ public authorities — in 1933, he headed three others, in addition to the Triborough Bridge, all created that year — provided thousands of jobs for construction workers, engineers, architects, accountants, attorneys, even law enforcement officers (his authorities were empowered to recruit and maintain their own police forces), few of whom were on city or state payrolls, but all of whom replenished public coffers by paying local and state taxes. The public quickly became accustomed to looking upon Robert Moses as a miracle worker for his ability to raise and spend millions of dollars to “get things done” without draining taxpayers’ wallets. Another three decades would pass before the public and politicians finally turned on him, disgusted with his high-handed arrogance and belatedly awakened to the fact that his highway projects had destroyed viable neighborhoods and were choking the metropolitan region with traffic and pollution. Moses passed from the scene, but the instrument with which he worked his miracles, the public authority, lived on, its luster undiminished. 28

The growth of public authorities as a means to finance expensive construction projects without unduly stressing state and local public finances occasionally raised concern. During a state constitutional convention held in 1938, delegates worried that public authorities were carrying out functions traditionally performed by state agencies, and were exposing the state to liabilities for debt undertaken by authorities. At the time, some forty public authorities existed in New York. That year, the state adopted a constitutional amendment mandating that authorities could henceforth be created solely by a special act of the legislature.

The amendment, and the onset of the Second World War, slowed creation of additional public authorities, but in the postwar period their number continued to grow. By 1956, another twenty-four authorities had been approved. A handful were designated to build bridges or ports; most were devoted to water treatment and distribution systems, or construction of parking garages and facilities, emblematic of the era’s economic expansion and burgeoning suburbanization. All shared a common characteristic: they generated fee-based revenue that could guarantee repayment of the bonds issued to construct and maintain the project.

In the 1960s, however, the state legislature began sanctioning public authorities whose functions were increasingly divorced from direct revenue-producing streams. Described as “financial-type” authorities, these entities sold bonds to finance construction of facilities that the authority did not itself operate. Rather, these authorities leased their facilities to the state, which then paid the authorities through revenues derived from specially designated taxes or fees.

Another innovation in financing, devised in 1960 with the assistance of a then little-known Manhattan attorney named John N. Mitchell, was the “moral obligation” bond,

28 Robert Caro, The Power Broker: Robert Moses and the Fall of New York (New York: Random House, 1975). See chapter 28 on the financing of the Triborough Bridge project.

In the 1960s, the state legislature began sanctioning public authorities whose functions were increasingly divorced from direct revenue-producing streams.


17

as distinct from the general obligation bond. 29 The latter, and more traditional, financial instrument is backed by the “full faith and credit” of the state, meaning state tax revenue; and in New York, that in turn meant that the bond issue had to be approved by voters during a general election. Should an authority funded through general obligation bonds default on its payments to bondholders because its revenues were insufficient to meet that demand, the terms of a general obligation bond guarantee that bondholders have first call on whatever funds are in the state’s coffers, and that if there are insufficient funds in the state’s treasury the state will make good on repaying the bonds with interest, even if legislators have to raise additional taxes to do so. A moral obligation bond, on the other hand, makes no such explicit guarantee. Rather, it simply promises that in the event of default, the state has a “moral obligation” to make good on the bond. And the state did not have to ask voters to approve issuance of such bonds because, technically, there is no legal commitment that the state back them. 30

So long as the state’s economy remained sound and an authority generated sufficient revenue to pay the lease fees for the newly created financial-type authorities, New Yorkers had no reason to inquire too closely into the implications of moral obligation bonds. Then, in the waning days of 1974, one of the state’s largest financial-type authorities, the Urban Development Corporation (UDC), found itself with over $1 billion in outstanding bonds, operating costs of $1 million a day, and no funds to meet its obligations to bondholders. The UDC was a model of the new type of authority. Created in 1968 as a response to inner-city turmoil in New York’s urban areas, Governor Nelson Rockefeller launched an initiative to build new low- and moderate-income housing throughout the state. UDC was designed to leverage federal funds provided by the federal Department of Housing and Urban Development (HUD) to subsidize new construction. During President Richard Nixon’s first administration (1969-1973), HUD Secretary George Romney and UDC Director Edward Logue had what The New York Times described as a notably “cooperative” relationship, which led Logue “to go into construction in advance of a signed contract from HUD assuring the availability of the subsidies necessary to market the housing.” 31

But in 1973, those federal subsidies dried up. Following Nixon’s reelection, Romney left HUD. One of his parting acts was to announce a nationwide moratorium on new commitments to housing subsidies, reflecting the administration’s “disillusionment” with the program. UDC, which had sold a little more than $1 billion in moral-obligation bonds in anticipation of HUD funds, found itself, in late December 1974, with half-finished,

29 Thirteen years later, Mitchell gained wider public renown in Washington as Attorney-General of the United States under President Richard M. Nixon.

30 Alfonse A. Narvaez, “Levitt Warns on Public Authority Debt,” New York Times, January 20, 1975, describes the terms of the new bond instrument. Robert J. Cole, “U.D.C. Default Stirs Fear of ‘Moral Obligation’ Bonds,” New York Times, March 24, 1975, identifies John N. Mitchell as a major figure in creation of the financial instruments. By 1975, seventeen public authorities in New York State were issuing moral obligation bonds; see “State Agency Gets Loan at 9.6 Rate,” New York Times, April 24, 1975.

31 Alan S. Oser, “How the U.D.C.’s Reach Came to Exceed Its Grasp,” New York Times, March 16, 1975.


A moral obligation

bond simply promises that

in the event of default,

the state has a “moral

obligation” to make good on the bond.

And the state did not have to ask voters

to approve issuance of

such bonds.

18

multimillion dollar projects on its hands, no money to complete them and a deadline to make payments on the bonds in late February 1975. Malcolm Wilson, Rockefeller’s successor as governor, who a month before had been defeated for election, handed the problem to his successor, Hugh Carey. 32

Carey, who six months later would be embroiled in a much larger and more protracted effort to save New York City from bankruptcy, first approached the state’s (and the nation’s) largest commercial banks, traditionally the initial syndicators of state bonds, to refinance UDC’s notes. Nine of eleven banks refused. On Tuesday, February 18, UDC was technically in default when it was unable to pay $100 million in notes and $4.5 million in accrued interest. The authority’s collapse was barely averted when Carey and the new chairman of UDC, Richard Ravitch, succeeded in wresting a $90 million appropriation from the state legislature for a state Project Finance Agency (Ravitch and Carey had originally asked for $110 million, but Albany’s lawmakers balked), which was enough to keep the authority functioning for the next two months. 33

UDC’s brush with default demonstrated that the major benefit derived from moral-obligation bonds was their ability to allow the State of New York to circumvent its constitution’s requirement that voters approve bond issues before the state took on massive amounts of debt. Moreover, the UDC crisis demonstrated that public authorities, at least the finance-type authorities launched during the 1960s, did not automatically shift the costs of their activities from taxpayers to bondholders and those who paid fees to use the authorities’ services. Moral obligation bonds may not include language that the state is legally obligated to pay off the bonds in case of default, but when the UDC went into technical default, the state — meaning its taxpayers — paid nevertheless, in the form of the legislature’s emergency appropriation to bail out the bankrupt authority. The state was forced to come to the UDC’s rescue because not to do so would have dried up other lines of credit, endangering, as New York City discovered a few months later when it went into default, such routine activities as issuing payroll checks to its employees.

As it was, the UDC debacle ricocheted through the state and national economies. The bond market, rendered skittish by troubles in New York, either backed away from bond issues by other states’ housing agencies, as in Michigan, or demanded higher interest rates, as in New Jersey. In the latter instance, the acting executive director of the New Jersey Housing Finance Agency reported that $54 million in short-term notes issued a month after UDC’s technical default commanded rates of 7.4 to 7.9 percent; he estimated that, without UDC’s problems, they would have sold at 6 percent. 34 New York was hit even harder: in April 1975, the Medical-Care Facilities Finance Agency was forced to pay interest of 9.6253 percent on a $62 million bond issue, and 10.04 percent to sell $72 million

32 On Governor Wilson’s knowledge of UDC’s state, see Linda Greenhouse, “After 5 Months, the Crisis Mood at U.D.C. Gives Way to a Steady Salvage Operation,” New York Times, July 24, 1975.

33 Ibid.

34 Joseph P. Fried, “U.D.C.’s Ripple Effect,” New York Times, April 3, 1975.

The major benefit derived from moral-obligation bonds was their ability to allow the State of New York to circumvent its constitution’s requirement that voters approve bond issues before the state took on massive amounts of debt.


19

of State Dormitory Authority bonds a month later. 35

That bond buyers got extra interest for their risk in buying these notes meant that the people who used the facilities or services of these authorities paid higher fees than they would have had the interest rates been lower, because the amount of repayment of the bonds and interest was greater in the aftermath of UDC’s troubles. What had once looked like an endless free lunch was revealed to have the potential for being an unexpectedly expensive meal, indeed.

Reeling backward from a fiscal abyss, the legislature made a show of reining in public authorities’ ability to take on excessive debt. But, as will be seen in subsequent efforts heralded as major reform, measures enacted in 1976 were more cosmetic than effective. Since UDC had issued bonds whose face value far exceeded the entity’s capacity to redeem them given its revenue stream, the legislature passed a law capping the amount of moral obligation debt authorities could issue. Nevertheless, when in subsequent years authorities began to reach those limits, it became customary to ask the legislature to increase the caps — which it did, routinely. 36

The legislature also created a Public Authority Control Board, to which eleven of the state’s largest authorities were required to submit “applications for approval of financing and construction of any project proposed.” The board is composed of a five-member panel, consisting of representatives of the governor, Assembly speaker, Senate majority leader, and of the leaders of the Assembly and Senate minorities. Final say is in the hands of the first three, since the minority representatives may ask questions, but may not vote. Though its meetings are open to the public and press, the ways in which it reaches decisions are notoriously opaque. All three voting members must assent to any application for it to be approved, but rarely do any of them provide reasons for their votes. In fact, applications have been disapproved when one of the three voting members has abstained from or by not showing up for a vote — a procedure which, in the absence of a requirement to state a reason for a vote, leaves the public none the wiser about the merits of a project, and has raised suspicions that the board has become a tool of the state’s “big three” political leaders to engage in horse-trading on other legislative proposals that may or not be related to public authorities. 37

With these palliative measures in place, New York then proceeded over the next twenty-five years to create thirteen major additional authorities and a host of smaller entities to address needs ranging from horse breeding and thoroughbred racing to paying state aid to local governments on time and rescuing county-operated hospitals.

New York’s thirst for growth — and indebtedness — remained unslaked.

35 “State Agency…,” New York Times, April 24, 1975. “Bonds of State University Sold at Record-High Rate of Interest,” New York Times, June 26, 1975.

36 Reining…, footnote 6, cited in footnote 27, above.

37 See Seymour Lachman and Robert Polner, Three Men in a Room: The Inside Story of Power and Betrayal in an American Statehouse (New York: The New Press, 2006), 143-145.


What had once looked

like an endless free lunch

was revealed to have the

potential for being an

unexpectedly expensive

meal.

20

IV.“New York’s Secret Government”

Almost three decades passed before an elected official — New York State Comptroller Alan Hevesi — launched a serious campaign intended to make the state face up to the problems posed by unchecked growth of public authority debt. That the first engagement took place when he locked horns with the MTA over its fare hike proposal in 2003 should not have come as a surprise.

Hevesi had arrived in Albany as New York State’s comptroller in 2002 after having served the previous eight years as New York City’s comptroller. City and state politics were his life. Elected to the state Assembly at the age of 30 in 1971, he earned a doctorate that same year from Columbia University with a dissertation entitled “Legislative Leadership in New York State.” He went on to serve in Albany’s lower house for the next twenty-two years, while also teaching political science as a member of the Queens College-City University of New York faculty. In 1989, he made an unsuccessful run for New York City comptroller while still in the Assembly; in 2001, his tenure as comptroller about to end due to term limits, he failed in a primary bid to become the Democratic nominee for mayor. He then ran and lost to Republican Rudolph Giuliani as the Liberal Party’s candidate. A year later, he returned to Albany after winning a race to become state comptroller.

In the nation’s largest and most politically liberal city, Hevesi cut an unusual figure: he was a debt-hawk Democratic. He wasn’t opposed to budget deficits when necessary; Keynes and FDR had settled that argument during the Great Depression. But Hevesi was attuned to the amount of debt that deficits piled up and the dangers they posed if they threatened to outrun the city’s tax base. He became known for his warnings about debt. But his two terms in office occurred during the boom years of the Clinton economy, when Wall Street and real estate, increasingly the largest sectors of the city’s economy, were flush with cash, and his warnings were usually brushed aside as jeremiads.

Hevesi garnered popular — and favorable — attention, though, with his audits of local government agencies, exposing waste, malfeasance and incompetence. He assembled a good staff of auditors and press release writers who were skilled at zeroing in on egregious practices and then describing them with headline-grabbing phrases. These were the tactics he loosed on the MTA in the winter and early spring of 2003; and though he failed to roll back the authority’s fare and toll hikes, he succeeded in forcing the transportation giant to become more transparent and more accountable in its expenditures of public monies.

Ten months after the MTA battle, in February 2003 his Albany office released a 55-page report entitled Public Authority Reform: Reining in New York’s Secret Government. 38 It was a sober, straightforward document, without partisan rhetoric or finger pointing, designed to lay out the growth of public authorities and of public authority debt; the lack of sufficient mechanisms for exercising oversight over authority expenditures and debt; and suggested measures for reform.

38 See footnote 27, above, for complete bibliographical citation

Hevesi was attuned to the amount of debt that deficits piled up and the dangers they posed if they threatened to outrun the tax base.


21

How many public authorities did New York State have? The last time officials had attempted to count the number of the state’s public authorities, they had thrown up their hands in exasperation. “At present,” reported a State Commission on Government Integrity in 1996, “so far as Commission staff has been able to determine, no one has even an approximate count of how many of these organizations exist, where they are, much less an accounting of what they do.” The best the commission could do was to make reference in a footnote to the 1985 edition of the Local Government Handbook, published by the Governor’s Office, which said there were 46 statewide or regional authorities, and “about” 529 local authorities. 39 Hevesi’s staff, however, was able to nail down the number with some greater precision — 643 — and provided a listing that extended over seven double-columned pages in a type-size usually reserved for classified ads and legal notices in newspapers’ back pages. 40

Some, like the Dormitory Authority — which despite its name, plays a major role in financing hospital and other large construction projects throughout the state — had immense operating budgets. Others, like the Overcoat Development Corporation, apparently existed in name only. 41 To bring some order to this welter of entities, the report assigned each of the 643 to a class:

Class A (169 authorities) comprised “[m]ajor public authorities with statewide or regional significance and their subsidiaries”;

Class B (43 authorities) were “affiliated with a State agency, or entities created by the State that have limited jurisdiction but a majority of Board appointments made by the Governor or other State officials”;

Class C (425 authorities) consisted of “[e]ntities with local jurisdiction”; andClass D (6 authorities) was composed of “[e]ntities with interstate or international

jurisdiction and their subsidiaries[.]” 42

How much public authority debt was the state responsible for? Of the 643 public authorities the Comptroller’s Office identified, 17 stood out for particular discussion. Each was a Class A authority, and, at the close of 2002, each carried more than $100 million in debt, for a combined total of $105 billion of debt.

39 The statement appeared in “Underground Government: A Preliminary Report on Authorities and Other Public Corporations,” issued by the State Commission on Public Integrity, 1996; cited in Lachman and Polner, Three Men in a Room, 133.

40 Reining…, 14, 47-53.

41 The Overcoat Development Corporation, a subsidiary of the Empire State Development Corporation mega-authority, was created in 1986 in hopes of luring an Indiana clothing manufacturer to move its operations to the town of Amsterdam, in the Mohawk Valley region of central New York. The manufacturer never relocated, but the corporation remained in existence, at least on New York State’s books. In March 2004, following release of Hevesi’s report, Dan Barry wrote a breezy feature story for The New York Times, describing his unsuccessful search to locate anyone who would speak on the record about the Overcoat Development Corporation and its activities; “About New York: The Cold Facts of Officialdom, Albany-Style,” New York Times, March 20, 2004. The ODC became a poster child for New York State’s penchant for creating public authorities.

42 Reining…, 14


In 1996, a State Commission on

Government Integrity

reported that “so far as

Commission staff has

been able to determine, no one has

even an approximate count of how

many of these organizations

exist, where they are,

much less an accounting of

what they do.”

22

Hevesi’s office, however, was most interested in how much of this debt was state-supported, meaning: How much were the state’s taxpayers, who had never had an opportunity to vote on running up this debt, responsible to pay off in the event one or more of these authorities someday found itself, like the Urban Development Corporation in 1975, unable to meet its bond obligations?

The answer was: nine of the seventeen Class A authorities identified were responsible for $34 billion of state-supported debt, which in turn accounted for 90 percent of all state-supported debt.

To put this in perspective, the report noted, first, that 17 years earlier, in 1985, all state-supported debt totaled only $5.7 billion, and accounted for only 60 percent of that debt. Second, general obligation debt — debt backed by the “full faith and credit” of the state that New Yorkers had approved by voting to tax themselves — had remained fairly steady since 1985, and in 2002 stood at approximately $3.4 billion — one tenth the amount of the public authorities’ state-supported debt, and which voters had had no opportunity to approve or reject.

Moreover, service payments on this debt — consisting of interest payments on bonds, plus funds regularly set aside to repay the bonds’ principal when they were finally redeemed — was increasing rapidly because of the state’s reliance on public authority financing. Hevesi’s report noted that, under the proposed capital spending plan outlined in the state’s 2004-05 Executive Budget, which projected such spending over the next four years, debt service costs would increase more than 60 percent, from $2.9 billion in 2004-05 to $4.6 billion in 2008-09. 43

In other words, debt service payments — the factor that had been cited only a year earlier by the MTA as crucial in its decision to raise fares and tolls — would soon outstrip the state’s general obligation debt, if the proposed 2004-05 capital plan were adopted.

How comprehensive and effective was oversight of the state’s public authorities? The report carefully noted that the authorities, though “creatures of New York State and local governments,” were specifically designed to be able to “operate independently and with more flexibility” than state agencies, which are dependent on legislative appropriation cycles and oversight. Still, the report continued, “certain oversight mechanisms have been put in place.” However, a close reading of the report indicated that those mechanisms were, at best, spotty and frequently far from effective.

Despite its name, the Public Authorities Control Board (PACB), created in 1976 following the Urban Development Corporation’s near default, had oversight over 11 of the state’s 643 public authorities. Of the 11, seven were among the nine authorities that accounted for 90 percent of New York’s $34 billion of state-supported debt; and those seven subject to PACB review, accounted for only a little over half — $19.149 billion, or 56 percent of that state-supported debt. The other four authorities not subject to PACB oversight that were responsible for the other 44 percent — $14.643 billion — of state-supported debt were major Class A authorities: the MTA, the New York State Thruway Authority, the Triborough Bridge and Tunnel Authority, and the Local Government

43 Ibid., 4, 15, 17.

Debt service payments would soon outstrip the state’s general obligation debt, if the proposed capital plan were adopted.


23

Assistance Corporation. 44

What of the other 632 authorities not covered by the Public Authorities Control Board? The report observed that the state’s then-current Public Authorities Law required most, but not all, authorities to submit annual statements, independent audits and other reports to the comptroller, governor and legislature. “Information about just over 50 public authorities,” the report continued, “including data from the required annual reports, is readily available to the public on the Web site of the Office of the State Comptroller.” 45 That number amounted to less than 10 percent of the total number identified in the report. This did not necessarily mean that such information was unavailable if one did Web searches or mailed request to authorities’ offices. It did indicate, however, that it was difficult and time-consuming to assemble the data necessary to get a complete overview of public authorities’ activities and their impact on the state’s financial status.

The main task of ensuring that public authorities are well managed, fiscally and programmatically, the report noted, was in the hands of each entity’s board. Legislation creating each authority generally specified the number of board members and the state official responsible for making each appointment. An inventory of 58 of the state’s largest Class A and B authorities, released by Hevesi’s office six months later, determined that, of 409 total positions, appointments by the governor accounted for 233, or nearly 57 percent of currently serving board members; when ex-officio appointments were factored in, the number rose to 305, and the percentage rose to 75 percent. By comparison, legislative leaders of the state’s Assembly and Senate each appointed 22 board members, and the comptroller recommended appointees for four positions. 46 The state’s Public Authority Law contained provisions regarding board meeting quorums, voting majorities, and procedures for removing board members. Otherwise, there were no standards specified regarding board size in relation to the size of an authority’s budget or operations, or regarding board members’ qualifications for service. Thus, for example, the sizes of the boards of authorities holding the three largest amounts of state-supported debt in 2002 — the Dormitory Authority, the Thruway Authority, and the Urban Development Corporation — were governed by 11, 3 and 8 board members, respectively; of 22 board members in all, the governor appointed 19. 47

Since the Port Authority’s inception in 1921, public authorities had been governed by boards composed of prominent citizens, rather than elected officials, on a private-sector corporate model intended to insulate the authorities’ decision making and planning from the ebb and flow of political tides. Such independence alone, however, did not necessarily guarantee good governance, as the comptroller’s office report of February 2004 illustrated.

44 Ibid., 17, 22.

45 Ibid., 23, 25.

46 Public Authority Governance in New York State: Members of Boards of Directors (Albany: Office of the State Comptroller, August 2004), 4. Deputy Comptroller Margaret M. Sherman, of the Office of Budget and Policy Analysis, was listed as principal author [http://www.osc.state.ny.us/reports/pubauth/paboards804.pdf]. Hereafter cited as Governance…

47 Ibid., 27, 66, 67.


There were no standards

regarding board size in

relation to the size of an

authority’s budget or

operations, or regarding

board members’

qualifications for service.

24

Ten pages were devoted to a digest of 63 instances between 1965 and 2003 in which audits or other investigations of 31 authorities found “bribery, nepotism, bid-rigging, misuse of funds and financial mismanagement — costing the State tens of millions of dollars and resulting in the indictments of dozens of authority employees.” 48

Public Authority Reform: Reining in New York’s Secret Government was the first comprehensive review of the state’s public authority system since 1956, when State Senator William Hults had chaired a bipartisan commission to examine what his commission’s study revealed were the state’s 33 public authorities.

At the same time his report was published, Hevesi, with support from State Attorney General Eliot Spitzer, presented a draft of a Public Authority Reform Act of 2004 intended to “increase accountability, deter misconduct and reduce waste and inefficiency” in the operations of the state’s public authorities. Its main provisions included: adopting Hevesi’s “classes” to designate authorities by functions; establishing a temporary commission with power to review Class A and B entities, and to recommend revision of their function or merger with other authorities or state agencies, subject to legislative disapproval; granting the commission power to make similar recommendations to the governor and legislature regarding Class C and D authorities; requiring statewide authorities to adopt stronger governance standards by rotating audit firms or partners every five years; requiring audits to be conducted according to generally accepted accounting principles; compelling authorities to adopt procurement contract guidelines equal to those used by state agencies; granting the state comptroller’s office discretion to review such contracts before they went into effect; and authorizing the comptroller to designate a deputy comptroller to supervise public authorities, with the cost of such supervision to be funded through an assessment on the authorities. 49

48 Reining…, 29; digest of audit and investigation findings, 29-38.

49 “Hevesi and Spitzer Call for Major Reform of Public Authorities,” press release, Office of the New York State Comptroller, February 24, 2004 [http://www.osc.state.ny.us/press/releases/feb04/022404.htm]. The proposed Public Authority Reform Act of 2004 was introduced in the legislature as Senate bill S.7301 and as Assembly bill A.11414.


25

V.Thrust and Parry: Setting the Parameters of Public Authority Reform

An unstated subteXt implicit in Hevesi’s February 2003 report about “New York’s secret government” was apparent in a follow-up study, released six months later, entitled Public Authority Governance in New York State: Members of Boards of Directors. New York’s public authorities, ostensibly insulated from political control and infl uence in order to concentrate on their assigned missions, had become creatures of the state’s executive branch by virtue of the governor’s role in appointing board members. 50

Th is was not a revelation to close observers of state government. Early in the MTA’s 2003 campaign to increase fares and tolls, Th e New York Times had noted assertions that Governor George E. Pataki, while running for a third term in the early autumn of 2002, had sidestepped questions about possible MTA fare and toll hikes, and that the authority’s board had helped him by not raising the issue publicly, even as the MTA’s fi nancial reports pointed to a need for such increases. 51 Th en, a month after the governor was re-elected, the MTA declared publicly that it had a $2.8 billion defi cit and would raise fares and tolls.

During his years in Albany, Pataki, fi rst as a Republican state senator from the Hudson Valley region and then as governor, had generally hewed to his party’s stance of decrying tax increases and cutting taxes when possible, while at the same time accommodating voters’ appetites for expanded public services. He satisfi ed these seemingly confl icting demands through public authority issuance of state-supported debt, a path blazed by his predecessors, both Republican and Democrat.

Hevesi made no explicit reference to the governor’s solution, but the fact that the governor had employed this means emerged from close examination of a graph on page 16 of the comptroller’s February 2004 report, which demonstrated the increase in the amount of state supported debt. Pataki had fi rst taken offi ce as governor in 1994, and in the 12 years that followed, voter-approved general obligation debt remained fairly constant —between $3 and $4 billion — while state-supported debt issued by public authorities had grown steadily, from about $20 billion in 1994 to almost $34 billion in 2002. Th e governor’s name was nowhere listed on the graph; but anyone who correlated the dates on the x-axis of

50 See text referenced in footnote 46, above.

51 James C. McKinley Jr., “Political Fight With M.T.A. Won’t End with Vote,” New York Times, March 6, 2003.


New York’s public

authorities, ostensibly insulated

from political control and

infl uence in order to

concentrate on their assigned

missions, had become creatures of

the state’s executive

branch.

Source: Public Authority Reform: Reining in New York’s Secret Government. Albany: Offi ce of the State Comptroller, February 2004; p. 16.

26

the chart with corresponding occupants of the Governor’s Mansion in Albany could draw a reasonable inference of how a tax-cutting Republican could remain popular in a state whose voters were accustomed to a wide — and costly — range of public services.

Pataki’s appointment of Ira Millstein to a succession of posts examining public authority governance helped the governor to reframe the issue of authority reform in a way that deflected the matter of addressing and containing the state’s burden and responsibility for public authority debt.

A senior partner in the Manhattan law firm of Weil, Gotshal & Manges, Millstein had more than passing acquaintance with the dangers public debt could wreak on local government. In 1975 he had prepared the legal papers, which New York City’s Mayor Abraham Beame signed but never submitted to a federal court, declaring the city bankrupt during its defining fiscal crisis of the 20th century. 52 In the years following both the city’s and state’s recovery from that near-death experience, Millstein concentrated his legal work on counseling a wide range of prominent businesses and organizations (including General Motors, Bethlehem Steel, Tyco International, The Walt Disney Company, and the California Public Employees’ Retirement System) on corporate governance issues. His coauthored book, The Recurrent Crisis of Corporate Governance, first published in 2003, is a standard work in its field and used in business programs across the nation, such as Yale University’s School of Management, where Millstein has served as senior associate dean and director of its Center for Corporate Governance (now named the Millstein Center for Corporate Governance and Performance).

He made his initial foray into public authority governance in mid-2003, at the invitation of Metropolitan Transportation Authority Chairman Peter Kalikow, following the transportation giant’s widely faulted mismanagement of fare and toll increases that year. On June 26, with some fanfare, the MTA issued a press release announcing that Millstein and Richard Davis, a partner in Weil, Gotshal, had been retained “to strengthen and enhance its corporate governance guidelines … as part of the MTA’s ongoing effort to make the agency more transparent and efficient.” The statement noted that Millstein and Davis would “work directly” with the authority’s chairman, executive director and board members. 53 Nearly six months later, when the results of Millstein’s recommendations were reported in The New York Times, those recommendations served as a template for the program of reform of other public authorities favored and put in place by Governor Pataki: adoption of guidelines for good corporate governance, patterned on guidelines adopted by large publicly-owned shareholder corporations; development of written charters defining subcommittee responsibilities in order to make their activities clearer to the public; direct reporting by internal auditors to the chairman and audit committee; and separating the

52 Millstein’s role in preparing the bankruptcy filing is cited in Henry J. Stern, “Three Levels of Government Have Substantial Debt Load. 1975 Fiscal Crisis Revisited,” March 23, 2007 [http://www.nycivic.org/articles/070323.html].

53 “MTA Board Approves Corporate Governance Expert,” press release, Metropolitan Transportation Authority, June 26, 2003 [http://www.mta.info/mta/news/releases/?en=030626].

Millstein’s recommendations served as a template for the program of reform of other public authorities favored and put in place by Governor Pataki.


27

functions of board chairman and executive director. 54

From Millstein’s perspective, The New York Times’ Mike McIntire reported, board governance had been a key problem for the MTA:

Noting that many of the board’s members each represent a specific community or interest group, Mr. Millstein said it was important for the directors to learn to think and act in the best interests of the authority as a whole.

“Our impression is that they each think they are responsible for their own [subsidiary] agency or issue, when in fact it is much broader than that,” Mr. Millstein said. “I don’t mean to frighten them, but the authority has issued $16 billion worth of debt. Under securities laws, they are all responsible for any false or misleading information that could be released in connection with that.” 55

That was Millstein’s only mention of the MTA’s debt in public reporting of his recommendations, and he cast the matter in the framework of rules governing publicly-traded shareholder corporations in the wake of the Sarbanes-Oxley Act of 2002. But public authorities are neither publicly traded nor shareholder entities, and thus none of even the most basic mechanisms for challenging decisions and actions by an authority’s board — such as amassing amounts of debt so that debt service distorts prices charged to users — are available to either users or bondholders. 56

The MTA had undoubtedly hoped for a public relations coup in hiring Millstein, one that would erase or at least ease the previous winter’s public relations disaster. Richard Brodsky, a Democrat in the New York State Assembly who chairs its committee on corporations, authorities and commissions, which had conducted testy hearings with MTA officials over the authority’s fare and toll increases earlier in the year, remained unmoved. “This is not reform,” he told The New York Times. “This is a rearranging of the deck chairs in first class on the Titanic. It’s administrative restructuring, that’s all, and it would be unfortunate if they try to sell this as something more than it is.” Bond Buyer, a trade publication for the financial industry, added that Brodsky proposed that an independent budget office be created and an independent inspector general be appointed to oversee the MTA and other major state authorities. 57

The MTA paid little heed to Brodsky’s reaction. In late January 2004, Katherine

54 Mike McIntire, “M.T.A. to Unveil Management Reforms,” New York Times, December 18, 2003. See also, Martin Z. Braun, “Reform-Minded N.Y. MTA Looks Ahead to a Less Troubled 2004,” Bond Buyer, vol. 346, issue 31789 (December 29, 2003).

55 McIntire, footnote 53, above.

56 For an extended discussion of problems associated with applying private-sector corporate governance models to public authorities, see Jonathan Rosenbloom, “Can a Private Corporate Analysis of Public Authority Administration Lead to Democracy?” New York Law School Law Review, 50 (2005-2006) [http://www.nyls.edu/pdfs/NLRVol50.4-407.pdf].

57 See footnote 53.


“This is not reform. This is a rearranging

of the deck chairs in first

class on the Titanic. It’s

administrative restructuring

... and it would be unfortunate

if they try to sell this as something more than

it is.”

28

Lapp, the authority’s executive director, speaking to lawmakers in Albany, told the Joint Legislative Fiscal Committee that Millstein’s recommendations would “enhance the way the MTA Board and Executive staff manage the nation’s largest public benefit corporation,” and noted that the authority “will be one of the first public agencies in the nation to embrace such a governance model.” Later, two thirds of the way into her prepared remarks, she presented a grim set of numbers from the MTA’s new, publicly reported four-year financial forecast — a reporting innovation Hevesi had wrested from the authority in the wake of its fare and toll hike debacle. The authority, Lapp reported, faced growing budget gaps in each of the next three years: $688 million in 2005, $1.3 billion in 2006, and $1.4 billion in 2007. The greatest portion of these “structural imbalances,” she noted, was attributable to debt service expenses. In 2003, these expenses represented 16 percent of the MTA’s operating revenue; by 2007, debt service, she projected, would consume 31 percent of operating revenue. It was apparent in Lapp’s report that the Millstein reforms of the MTA’s governance bore no explicit relationship to management of its pressing debt burden. 58

January 2004 also marked the beginning of a new legislative season in Albany and the start of what would be a two-year contest of thrust-and-parry between Governor Pataki, on one side, and the state’s comptroller, attorney general and legislature to shape and control an agenda for public authority reform. In February, Hevesi and Spitzer opened the contest by arranging to have their draft Public Authority Reform Act adopted by legislative sponsors in the Assembly and Senate. Implicit in the draft bill were challenges to the governor’s of the authorities by virtue of his power to appoint board members.

Governor Pataki, in response, said he welcomed working with the legislature. He also enlisted Ira Millstein to work with his secretary, John Cahill, in drawing up “model governance principles” based on “best practices” of private-sector corporate governance that would be appropriate for adoption by the state’s public authorities. Among these principles, based on practices Millstein had recommended seven months earlier to the MTA, were training board members about their legal, fiduciary and ethical responsibilities; appointing governance and audit committees; and assuring that authorities’ chief executives were not also members of the board, in order to preserve independence of board oversight functions. The principles were soon circulated to 31 of the state’s largest authorities, accompanied by Pataki’s announcement that he was appointing Millstein to chair a Public Authority Governance Advisory Committee. The committee was charged with reporting by June about the authorities’ responses in implementing the principles; making recommendations to modify any of the principles, and suggesting other matters that required additional exploration. 59

58 “Remarks of Katherine Lapp, Executive Director and Chief Executive Officer, Metropolitan Transportation Authority, Before the NYS Joint Legislative Fiscal Committee, January 27, 2004,” Metropolitan Transportation Authority [http://av0.mta.info/mta/news/public/testimony040127.htm].

59 For descriptions of the Cahill memo and the Public Authority Governance Advisory Committee’s mandate, see the Citizens Budget Commission report, Public Authorities in New York, April 2006, p. 40 [http://www.cbcny.org/Authority_Reform_CBC.pdf]; and Public Authorities in New York State: Accelerating Momentum to Achieve Reform, Office of the State Comptroller, April

In 2004, of $114.6 billion of outstanding public authority debt, slightly less than one third — $35 billion — was state-supported, and amounted to 90 percent of the state’s $39 billion of debt.


29

While Millstein’s advisory committee was receiving and digesting the authorities’ responses, Hevesi and Spitzer announced on April 12 the formation of a coalition of 35 public interest organizations and unions that had pledged to support their reform legislation. Hevesi also used the opportunity to announce a follow-up survey of 214 authorities, which revealed that they held approximately $114.6 billion in outstanding debt — an amount, he noted, that was larger than the state’s budget for that year and larger than the budgets of any state except California. Moreover, of the $114.6 billion, slightly less than one third — $35 billion — was state-supported, and amounted to 90 percent of the state’s $39 billion of debt. Hevesi also reiterated how little oversight the state exercised over the authorities’ spending. In 2002, he reported, 44 authorities notified the comptroller’s office regarding 11,270 contracts worth $10.5 billion. While his staff was required to review all state agency contracts, it had a mandate to do so for only two of the state’s 643 public authorities. Thus, in 2002, the comptroller’s office had been able to examine only 100 of the 44 authorities’ 11,270 contracts. 60 Granting the comptroller oversight to review and approve all authority procurement contacts was one of the Hevesi-Spitzer reform legislation’s provisions.

On May 11, three months after he had announced its formation, Governor Pataki issued a statement in which he named five members to serve on the Public Authority Governance Advisory Committee. The governor also enlarged the committee’s scope to include development of “recommendations for any legislation that it deems necessary or desirable to fully implement the [model corporate governance] principles within State public authorities.” 61 According to the next day’s New York Times, Hevesi deemed the committee’s efforts “a very positive step on the part of the governor to begin the process of dealing with one important step in the reform of public authorities.” But, he added, “The other important issues are contracting, lobbying, budgeting and the creation of a mechanism to review the mission of each authority.” 62

A draft of the Millstein committee’s preliminary report on implementation of his model governance principles was forwarded to the governor toward the end of June. The New York Times, which obtained a copy prior to official publication, placed the report’s recommendations in the context of a political contest between the governor and the

2005, pp. 25-28 [http://www.osc.state.ny.us/reports/pubauth/publicauthoritiesreform.pdf].

60 “Hevesi and Spitzer Announce Coalition to Promote Reform of Public Authorities and Greater Accountability. State Public Authority Debt Total Exceeds $114.6 Billion,” press release, Office of the New York State Comptroller, April 12, 2004 [http://www.osc.state.ny.us/press/releases/apr04/041204.htm]. The two authorities that report procurement contracts to the comptroller for review — the Long Island Power Authority and the New York State Thruway Authority — awarded $5.4 billion in such contracts, or slightly less than half the total amount Hevesi cited. See “Public Authority Contract Data 2002,” table accompanying April 12 press release [http://www.osc.state.ny.us/press/releases/apr04/publicauthoritiesdata.pdf].

61 “Governor Pataki Names Six to Serve on Public Authority Governance Advisory Committee,” press release, Office of the Governor, May 11, 2004 [http://www.cicu.org/CMT/frontpage/040511ReleasePublicAuthority].

62 Michael Cooper, “Six Named By Pataki to Overhaul Authorities,” New York Times, May 12, 2004.


The draft report raised

questions about the basis

upon which authority

board members had been

appointed, as well as the applicability of corporate

standards to public

authority governance.

30

comptroller. The recommendations, reporter Michael Cooper noted, had been solicited by “Governor Pataki, a Republican, who by virtue of the appointments he makes effectively controls many of the state’s authorities”; but the recommendations contained in the report were “far more limited in scope than those proposed by a number of the state’s top Democrats …,” who were pressing in the Assembly for an independent office to review authority budgets, as well as for an independent inspector general to investigate fraud and misconduct. Most interestingly, the draft report raised questions about the basis upon which authority board members had been appointed, as well as the applicability of corporate standards to public authority governance. “After interviewing the current members of some boards,” Cooper wrote, “the committee praised them for having good intentions but noted … that it was not made clear ‘whether these board members had been selected because their individual skill sets or experiences fit their board assignments.’ ” The report, Cooper also noted, “departed from or weakened” some of the principles Millstein had helped to fashion and which had been circulated in February by Secretary to the Governor John Cahill. “The report,” Cooper wrote, “decided to strike an earlier provision barring employees of state or local government from serving on certain board committees, ‘in order to deal with political realities.’ And it decided that ‘a board made up completely of independent members should be an aspiration, rather than a requirement.’ ” Asked for comment, a spokesman for Hevesi’s office commended the report as “an important beginning,” but then asserted that “public authority reform is broader than just corporate governance.” 63

In August, Hevesi utilized greater nuance to co-opt the governance issue: his office published a 90-page report entitled Public Authority Governance in New York State: Members of Boards of Directors. 64 Observing that “While public corporations [i.e., public authorities] differ from private entities, lessons of corporate governance … have implications for other entities,” the report cited Ira Millstein’s writings, as well as his work with the MTA and the not-for-profit Nature Conservancy, as providing a basis for developing standards of board governance for the state’s authorities. Indeed, Hevesi’s report noted, the time was ripe to do so. Among the public authorities which had received Secretary Cahill’s February memo regarding implementation of the Millstein model governance principles, 49 percent of their board positions “were vacant or filled by individuals whose terms had previously expired or were set to expire in 2004… Quick action by each of the respective boards on the recommendation of the Public Authorities [sic] [Governance] Advisory Committee [chaired by Ira Millstein] to develop a profile of skill sets and experiences could have a significant effect on governance.” 65

The report also emphasized Hevesi’s efforts to advance a proposal made by a group of union leaders, state treasurers and state comptrollers to create a National Coalition for

63 Michael Cooper, “Trying to Untangle the Web of State Public Authorities,” New York Times, July 2, 1004.

64 Office of the State Comptroller, August 2004. Deputy Comptroller Margaret M. Sherman, Office of Budget and Policy Analysis, was listed as principal author [http://www.osc.state.ny.us/reports/pubauth/paboards804.pdf].

65 Ibid., 11-13, 16.

“The report decided that ‘a board made up completely of independent members should be an aspiration, rather than a requirement.’ ”


31

Corporate Reform. Its mission was to advocate for greater corporate board accountability and oversight on behalf of shareholder interests. Items on its agenda included education for and evaluation of directors, independence of board members (i.e., members must not be employees of the entity), and creation of audit committees. Similar proposals for public authority boards, the report emphasized, constituted key provisions of the Public Authority Reform Act submitted in February to New York’s Assembly and Senate by Hevesi and Spitzer. The report also noted that the proposals set forth by the governor’s committee headed by Millstein were “complementary” to the Hevesi-Spitzer legislation. 66

The governor and the comptroller resumed their jockeying to define the parameters of public authority reform in February 2005, a month after the start of a new legislative session. Pataki made the first thrust on February 8, issuing an executive order establishing a New York State Commission on Public Authority Reform. The new body was charged with developing model governance principles and, now, to monitor compliance with them. Its mandate was further enlarged to review the “intent, public purpose and mission of any public authority” and to recommend to the governor and legislature the “elimination, dissolution, consolidation or merger” of existing authorities or “the realignment of any function of any public authority by transferring such function to a State agency or other public authority.” Members of the new 13-person group were to be appointed by the governor; leaders of the majority and minority in the Assembly and Senate, and the comptroller and attorney general were each to name one member; the governor was to name the rest. In the calculus of Albany partisan politics, this formula was designed to appear bipartisan; but when the details were sorted out, the distribution ensured that Pataki appointed a majority of seven members and could count on two additional Republican appointees, to outnumber Democrats nine to four. And with the work of the Public Authority Governance Advisory Committee completed, Ira Millstein would be asked to continue his work as chairman of the commission. 67

Two weeks later, the state’s Democratic leadership united under Hevesi’s banner to announce support for an omnibus bill combining provisions of Hevesi’s draft legislation; a bill sponsored by Assemblyman Richard Brodsky and passed by the Assembly in 2004; and a bill sponsored by Senator Vincent Leibel that had been considered, but not passed, in the Senate. The press release issued by the comptroller’s office noted the initiative incorporated provisions provided by the governor and the Public Authority Governance Advisory Committee. But the statement’s heading — “Hevesi, Spitzer, [Assembly Speaker Sheldon] Silver, Brodsky Issue Sweeping Public Authority Reform Proposal” — signaled a clearly partisan turn in the campaign for reform. 68 Accompanying the announcement was a 55-page report from Hevesi’s office, Public Authorities in New York State: Accelerating

66 Ibid., 9, 13-14.

67 George E. Pataki, Executive Order No. 135: Establishing the New York State Commission on Public Authority Reform (signed February 3, 2005) [http://www.dos.state.ny.us/info/register/2005/feb23/pdfs/EXECUTIVEORDER.pdf].

68 Press release, Office of the New York State Comptroller, February 17, 2005 [http://www.osc.state.ny.us/press/releases/feb03/021703b.htm].


The distribution

ensured that Pataki appointed a majority of

seven members and could

count on two additional

Republican appointees,

to outnumber Democrats

nine to four.

32

Momentum to Achieve Reform, which revised upward the number of public authorities — 733 — as well as the estimate of debt service for state-funded public authority debt: $5.1 billion in 2009-10, an increase of 55 percent from $3.3 billion in 2004-05. 69

In contrast to Millstein’s emphasis on reforming the authorities through improved board governance, the Democrats’ revised legislation proposed strengthening regulatory measures by creating the post of public authorities inspector general, to be appointed by the attorney general; establishing a Public Authorities Budget Office, headed by an independent officer appointed by the comptroller; enforcing compliance with debt caps set by the legislature and requiring approval for programs that would exceed those caps; containing the increase in the number of authorities by requiring legislative approval when authorities wished to create subsidiary corporations; establishing a Temporary Commission on Public Authority Reform with an express mandate to recommend to the legislature elimination or consolidation of existing public authorities; imposing procurement rules as least as stringent as those required for state agencies, and submitting such contracts for review by the comptroller’s office; and applying state ethics laws to members of the larger and statewide authorities’ governing boards. 70 The revised legislative proposal accepted the Pataki-Millstein governing practices program and did not challenge the governor’s prerogative to appoint the vast majority of members who served on the larger statewide authorities. But it sought to balance the authorities’ insulation from political intervention by holding them to accountable for their financial impact on New Yorkers, whose fees and taxes ultimately guarantee the authorities’ ability to borrow funds for those projects.

In June, when the Democratic leadership’s bill finally made its way to passage by the Assembly and Senate, the Republican-controlled Senate had significantly watered down two key provisions the leadership had sought. 71 Rather than an inspector general appointed by the attorney general, the Public Authorities Accountability Act of 2005 created a state inspector general, with jurisdiction over executive branch agencies, departments, boards, commissions and statewide and local public authorities that did not have their own inspectors general. The new post was to be located in the executive branch; the person filling it was to be appointed by the governor, and the term of office was to coincide with the governor’s. 72

Absent also was a Public Authorities Budget Office whose chief was to be appointed by the comptroller. Instead, the act created a similarly-named Authority Budget Office (ABO). The new entity was not granted powers to analyze and report about the authorities’

69 Office of the State Comptroller, February 2005, pp. 5, 9 [http://www.osc.state.ny.us/reports/pubauth/publicauthoritiesreform.pdf].

70 See footnote 67, above.

71 See “Hevesi Outlines Authority Reform Proposal At Senate Hearing,” press release, Office of the New York State Comptroller, March 9, 2005 [http://www.osc.state.ny.us/press/releases/mar05/030905.htm].

72 Compare Section 28, Public Authorities Accountability Act of 2005, p. 19 [http://www.abo.state.ny.us/abo/Chap766of2005.pdf] with Section 7 of the Hevesi et al. draft omnibus public authorities reform bill, pp. 75-82 [http://www.osc.state.ny.us/pubauth/publicauthoritiesbill.pdf].

There are many curious paradoxes in Albany’s lawmaking folkways, and one of them is that even as the Public Authorities Accountability Act was awaiting signature, all the main actors realized it had not gone far enough.


33

estimated revenues and receipts, as well as changing revenue conditions affecting authorities’ budgets and indebtedness. Rather, its function would be to maintain an inventory of public authorities and their annual reports, assist the authorities with improvement of their management practices, and make reports received from the authorities available to the public on the Internet. 73

There are many curious paradoxes in Albany’s lawmaking folkways, and one of them is that even as the Public Authorities Accountability Act was awaiting Governor Pataki’s signature — he would sign it on January 15, 2006 — all the main actors in its formulation and passage realized it had not gone far enough and that more remained to be done.

Pataki acknowledged as much on June 8, 2005, when he advanced a legislative proposal to codify essential corporate governance proposals the Millstein advisory committee had suggested, such as adoption of ethics codes and board training about legal, ethical and fiduciary responsibilities. 74 The governor also issued an executive order instructing all public authorities to provide Millstein’s reform commission, which had begun holding meetings on April 13, information about their mission, program objectives, organization charts, lists of any subsidiaries, and summaries of projected revenue and expenses for the current and following fiscal years. 75

Hevesi, in a letter to the commission sent in late October, urged it to address issues and proposals his office had raised over the past two and a half years, including proliferation of public authority debt, pre-auditing of authority procurement contracts, and independence of the Authority Budget Office. 76

When the commission finally issued its 28-page report on May 17, 2006, 77 its recommendations focused largely on classifying the state’s public authorities by mission

73 Compare Section 27, Public Authorities Accountability Act of 2005, p. 19, with Section 8 of the Hevesi et al. draft omnibus public authorities reform bill, pp. 82-88 [Web URLs cited in previous footnote].

74 “Pataki proposes ethical conduct codes for public authorities,” The Business Review (Albany), June 9, 2005 [http://www.bizjournals.com/Albany/stories/2005/06/06/daily27.html].

75 George E. Pataki, Executive Order No. 137: Creating an Inventory and Classification of State and Local Public Authorities and Their Subsidiaries, June 8, 2005 [http://www.dos.state.ny.us/info/register/2005/june29/pdfs/ExecutiveOrders.pdf].

76 “Comptroller’s Letter to Commission on Public Authority Reform,” October 20, 2005, Appendix C of New York State: The Agenda for Reform, Office of the State Comptroller, March 2006, pp. 257-261 [http:www.osc.state.ny.us/reform/reform2006.pdf]. Hevesi’s office also issued a 94-page report, Public Authority Contracting Practices: Billions of Dollars of Public Funds Committed Without Adequate Oversight, Office of the State Comptroller, February 2006 [http://www.osc.state.ny.us/pubauth/publicauthoritycontracting.pdf], which concluded by reiterating Hevesi’s proposal that the comptroller’s office be granted legislative authority to review and approve contracts of Class A and Class B authorities. Deputy Comptroller Kim Fine, Office of Budget and Policy Analysis, was identified as principal author of both documents.

77 New York State Commission on Public Authority Reform, Report, May 17, 2006 [http://www.abo.state.ny.us/commissionPublicAuth/commishreport.pdf]. Hereafter cited as “NYSCPAR Report.”


The commission

found that New York

had 292 authorities,

rather than the 733 Hevesi’s

office had enumerated.

34

and function, and strengthening the Authorities Budget Office. Both undertakings reflected the orientation its chairman, Ira Millstein, had brought to his engagement with the Metropolitan Transportation Authority almost three years earlier, and the desire of George Pataki, the governor who appointed him, to maintain the executive branch’s ability to influence authorities’ policies.

Under the heading “Reorganization,” the commission found that, consistent with provisions of the Public Authorities Accountability Act, New York had 292 authorities, rather than the 733 Hevesi’s office had enumerated in February 2005. Halving the comptroller’s office’s number was a matter of identifying defunct authorities (20 local authorities and 35 housing authorities whose existence the commission’s staff could not verify through contacts with municipal and town officials). Also eliminated from the list were interstate or international authorities and their subsidiaries (four, including the Port Authority of New York and New Jersey), because the commission deemed that they were not within its scope; housing authorities, because they report to and are monitored by the U.S. Department of Housing and Urban Development, and were generally declared in 1957 to be outside the scope of the state’s Public Authorities Law; all public authority subsidiaries; and 14 entities and affiliates that the comptroller had categorized as Class B authorities but which the commission judged did “not seem to fit the Commission’s definition of ‘recognized’ public authorities.” 78

By applying an alternate categorization of what constituted a public authority, New York’s web of authorities suddenly appeared to become more manageable. Yet the report acknowledged that a great deal of additional legislation, over and above the Public Authorities Accountability Act, would be required if the commission’s remaining recognized authorities were to be made truly accountable. Therefore, the commission recommended that the newly-created ABO needed explicit legislative mandates to develop a process to screen proposed authority board members; require board directors to take an oath regarding their fiduciary responsibilities; set minimum performance standards and criteria for creating new subsidiaries; and standardize reporting formats of the authorities’ annual reports. 79

The degree of attention the commission gave to recommending additional legislation

78 Ibid., 21-23. A list of defunct authorities are provided in Appendix I of the report; lists of the commission’s 46 recognized state authorities and 246 recognized local authorities are contained in Appendix J of the report. (The commission’s decision not to include subsidiaries in its count of authorities led to the disappearance, at least as a “recognized” entity, of the reformers’ favorite whipping boy, the Overcoat Development Corporation.) However, as of September 2008, the Office of the State Comptroller’s Web site listed 860 entities (including subsidiaries) on its page devoted to public authorities [http://www.osc.state.ny.us/pubauth/byclass.htm]. Appendix L of the commission’s report provides a digest of the commission’s legislative recommendations. None of these appendices are available on the Authority Budget Office’s Web site, and written requests in August 2007 to the New York State Library, and in October 2007 to the Authority Budget Office, for copies proved fruitless. The author wishes to thank Mr. Ira Millstein’s office at Weil, Gotshal & Manges for providing a complete copy of the commission’s report.

79 NYSCPAR Report, 16-17; 8, 17; 8; 14-15.

The commission’s recognition that the act needed strengthening amounted to a concession that self-regulation had, at best, limited impact.


35

to increase and flesh out the role of the ABO provided an indication of the degree to which legislative compromise had weakened the Public Authorities Accountability Act. In fact, the commission’s recognition that the ABO and the act needed strengthening amounted to a concession that self-regulation — through board member oaths regarding fiduciary responsibilities, and adoption of mission statements and charters — had, at best, limited impact on changing the ways authorities operated, and that more potent state-sponsored regulatory oversight mechanisms were necessary. 80

But though the commission appeared dedicated to making the ABO as an instrument for overseeing the authorities, it insisted upon keeping the ABO tied to the governor. In a blandly worded paragraph that rewrote the raison d’être for quarantining public authorities from the disruptions of political pressure in fulfilling their missions. The commission wrote:

Yet, neither the authorities, nor the ABO, can be completely insulated from important policy issues, which of course are political in nature. Nor should they be. The ABO is not intended to be a policy making entity for the authorities. The ABO must be attuned to the Governor’s political input on authority activities which impact major policy issues regarding the State, and for which the Governor, the elected Chief of the State, does have responsibility. The authorities finance projects for drinking water and environmental protection; they build bridges and roads, and provide power and mass transportation, for example. The Commission recognized the propriety of the Governor’s input on such issues. 81

Elsewhere, in its concluding section, the commission was even more explicit about preserving gubernatorial prerogatives:

We propose not only very clear powers for the ABO, but also a structure that insulates it from outside influence in the conduct of its administrative duties, while preserving the Governor’s right and obligation to influence matters of significance to the welfare of the State. 82

The best the commission could do to square this circle was to recommend that while the director of the ABO should serve a fixed term of office, rather than at the pleasure of the governor, the director should also serve, for reporting purposes, “as a member of the Governor’s senior officer group,” and “be accountable to the Governor.” 83

The result was an unsatisfying exercise in political geometry. Passed over without

80 Ibid., Section III, entitled “The Governance Paradigm in the Private and Public Sectors,” 4-6.

81 Ibid., 10.

82 Ibid., 28.

83 Ibid., 10, 11.


The commission

chose to view the governor as the state’s

“commander-in-chief,”

overlooking the electoral parity of the comptroller

and attorney general as officials to

whom voters grant special

responsibilities concerning

fiscal and legal “matters of significance

to the welfare of the state.”

36

reference were earlier proposals by Hevesi’s office that the legislature empower the comptroller to appoint a deputy to oversee authority contracts and budgets, and that the legislature authorize an independent inspector general to investigate and refer allegations of malfeasance to the state’s attorney general. New York State’s comptroller and attorney general are elected in statewide contests at the same time as the governor, and all three offices, by definition, are concerned with the welfare of the state. But the commission chose to view the governor as the state’s “commander-in-chief,” overlooking the electoral parity of the comptroller and attorney general as officials to whom voters grant special responsibilities concerning fiscal and legal “matters of significance to the welfare of the state.”

As for the authorities’ role as a mechanism to issue state-related debt without voter approval, the commission treated it as a matter of ensuring adequate financial disclosure and transparency, stating that the issue of state debt reform was beyond its scope. But with the lightest of slaps on the wrist, the report noted that “the authorities are often unjustly blamed for being profligate issues of debt, whereas they are, in large part, acting at the behest of the Governor and the legislature.” 84 Nonetheless, the commission recommended two measures. The first was “constitutional debt reform,” whose nature it did not spell out, as a means of “clarifying the differences between the State’s financing program and the authorities’ independent activities.” The second recommendation was to specify one authority as the

designated issuer of state related debt [that] could be run by a board of directors comprised of State officials who would authorize the issuance of what, absent the constitutional limits, would be issued directly by the State. Such an issuer would then be under the direct supervision of the Governor and be answerable to the legislature. 85

Whether the state officials who would serve on the designated authority’s board would be chosen by or from within the executive branch, or whether its members would include the state’s comptroller and the legislature’s majority and minority leaders, was left unclear. In any event, the governor was, again, provisionally granted the paramount position. But failing adoption of either of these measures, the commission recommended reliance on the ABO to establish a reporting system that “clearly distinguishes between state related and other forms of authority debt.” 86

The Millstein commission report was not a trailblazing exploration of the state’s public authority “problem,” and it was not meant to be one. Other than its broad suggestions regarding state debt, it focused primarily on recommending additional legislation to fine tune the Public Authorities Accountability Act so that the Authority Budget Office would have greater ability to oversee and report on the authorities. The New York Times, evaluating the report in an editorial noted that, in recommending that the ABO be housed

84 Ibid., 12.

85 Ibid., 13

86 Ibid., 16.

“[T]he authorities are often unjustly blamed for being profligate issues of debt, whereas they are, in large part, acting at the behest of the Governor and the legislature.”


37

in the state’s executive branch, the commission, had, in effect, sided with Governor Pataki in his skirmishes with Comptroller Hevesi over reining in the authorities. 87

Eliot Spitzer succeeded retiring Governor Pataki in January 2007, having run on a promise that “Change Begins on Day One.” But a major change occurred even before Day One arrived: on December 22, 2006, less than two weeks before the new governor’s inauguration, Alan Hevesi resigned, after having been caught up in a scandal involving misuse of state employees to care for his ailing wife. The chief proponent of public authority reform had left Albany’s stage.

Hevesi was succeeded six weeks later by Thomas P. DiNapoli, a 21-year veteran of the New York State Assembly. Spitzer had appointed a panel to vet gubernatorial nominees for the office, whom he planned to present to the legislature for confirmation, and DiNapoli was not among the panel’s finalists. Nonetheless, the legislature, meeting in joint session in early February 2007 voted by an overwhelming margin to elevate DiNapoli to the post. A month later, the new comptroller warned that the governor’s proposed budget projected levels of spending that were “unsustainable” and would lead to a $13 billion deficit by the end of the next three years.

Five months into his term, Spitzer submitted two pieces of legislation to enact the Millstein commission’s main proposals for strengthening the ABO (the bill would rename it the Independent Office of Public Authority Accountability), and eliminate some 200 authorities deemed “operationally defunct.” The press release announcing the legislation quoted Ira Millstein as pronouncing the package “a thoughtful and major step forward in fulfilling many of the recommendations of the New York State Commission on Public Authority Reform.” 88 The proposals were submitted, but never passed during the legislative session.

By March 2007 Spitzer, too, had left Albany in scandal, resigning after his involvement with a prostitution ring came to light. He was succeeded by his lieutenant governor, David A. Paterson, who as a state senator in 2003 had been a lead plaintiff in an unsuccessful suit to halt the Metropolitan Transportation Authority’s fare and toll hikes.

In June 2008 The New York Times carried a brief item reporting talks between the new governor and the legislature about a package of public authority reforms drawn from the Millstein commission’s recommendations and bills introduced by Assemblyman Richard Brodsky and State Senator John J. Flanagan, who were leading negotiations for their respective houses. Among the proposed reforms was an “overhaul [of] an existing budget office for authorities … [to] transform it into an entity with teeth”; empowering the state comptroller to review and reject authority contracts; and treating board members as fiduciaries to make them legally responsible as agents for taxpayers’ interests. 89 But

87 “An Authority Over Authorities,” editorial, New York Times, May 28, 2006.

88 “Public Authority Reforms Strengthen Transparency and Accountability,” press release, New York State Executive Chamber, May 24, 2007 [http://www.ny.gov/governor/press/0524075.html].

89 Danny Hakim, “The Empire Zone: Seeking Oversight for Agencies,” New York Times,


The new comptroller

warned that the governor’s

proposed budget projected levels

of spending that were

“unsustainable” and would lead to a $13 billion

deficit by the end of the next

three years.

38

Albany’s legislative session ended six days later, and an authorities reform bill was not reported among those the governor signed in early July. 90

By late July the issue dominating Albany’s attention was a looming state budget deficit of $6.4 billion projected for the fiscal year beginning on April 1, 2009. In a rare televised address to the state on July 29, 2008, Governor Paterson declared, “The era of buy now, pay later and later is over,” and he called for the legislature to reconvene for a special summer session to help him cut $1.2 billion from an almost $130 billion budget adopted two months earlier. 91 Few, if any, reporters or commentators, however, made a connection between the governor’s statement deploring Albany’s buy now, pay later” predilections and the estimated $5.1 billion in debt-service charges the departed Alan Hevesi had three years earlier predicted the state would be paying by 2009-10 on its public authorities’ state-supported debt. 92

And less than a week before the governor sounded his alarm, the Metropolitan Transportation Authority announced that in addition to fares it had raised in March 2008, and fares it planned to raise in July 2009, it projected raising them again in early 2011. MTA Executive Director Elliot G. Sander cited rising fuel costs and declining real estate revenues as the main cause. But the report filed by The New York Times’ Ray Rivera noted another reason: “The authority is also struggling to pay interest on billions in debt accumulated since the 1980s for equipment upgrades. That debt service has mushroomed since the 2000 capital plan from a few hundred million a year to a projected $2 billion a year by 2012 — about a fifth of the agency’s budget.” 93

June 16, 2008.

90 Danny Hakim, “Paterson Backs Slot Parlor and Wine-Flavored Ice Cream in Bill-Signing Marathon,” New York Times, July 9, 2008. As of the first week in September 2008, the Web site for the New York State Legislature listed at least 36 bills — 21 in the Assembly, 16 in the Senate — pertaining to public authorities and awaiting further consideration [http://public.leginfo.state.ny.us/menuf.cgi].

91 Danny Hakim, “Governor Calls for Session on Fiscal Crisis,” New York Times, July 30, 2008; “Fiscal Woes of the Past Prod Paterson to Act Early,” New York Times, July 31, 2008.

92 See footnote 69.

93 Ray Rivera, “M.T.A. Says It Plans to Seek a Second Fare Increase, This One in 2011,” New York Times, July 24, 2008.


39

VI.Beyond Cosmetic Reform

New York State’s public authorities were initially a product of late Progressive Era optimism that citizens’ interests could best be served by taking heavily capitalized projects out of the hands of politicians and placing them in the those of citizen-directors and impartial administrators who would apply principles of “scientific management” until the projects were completed. The projects would then be turned over to the state. From that point on, citizens of the state who used what had been built by an authority would have a say in the fees and taxes they paid by casting their votes at election time.

That, at least, was the theory. The practice has evolved quite differently.Public authorities, as we have seen, are now so thoroughly enmeshed in state finances

through the growth of their state-supported debt that they are not simply “creatures of the state,” but an integral part of the state. The amiable fiction that the costs of an authority’s operations and services are borne by bondholders and user fees, and not by the state’s taxpayers, became, sometime in the 1960s, exactly that — a fiction — with the advent of moral obligation bonds and the growth of state-supported debt, the latter undertaken outside the state constitution’s mandate that no debt be assumed without voter approval in the form of a referendum proposed during a general election.

Today, the authorities’ collective bonded indebtedness is approximately the same as the state’s annual budget, and the state’s debt service payments on state-funded authority debt nearly equals the amount of the state’s budget deficit. It would be incorrect to state that debt service payments on state-funded authority debt are the cause of that budget deficit; but it is valid to note that the current national economic downturn, with its depressive effect on revenue collections, and the necessity to pay that debt service in a timely manner, lest New York default on its obligations, now drives state taxation and revenue appropriations policies.

The concerted three-year effort between 2003 and 2006 to strengthen oversight of New York’s public authority system produced what may, at best, be called “cosmetic reform.” The main accomplishment of the Public Authorities Accountability Act, adopted in 2005 and signed into law in 2006, was creation of the Authority Budget Office, a new state agency with weak regulatory powers, and whose function is essentially limited to reporting authority budgets and providing training members of authority boards about their management, fiduciary and ethical responsibilities. The critical issue — gaining control over the authorities’ role in the growth of state-funded debt — was, as the New York State Commission on Public Authorities Reform, headed by Ira Millstein, properly acknowledged in its recommendations, not addressed by the act.

A number of comprehensive solutions to New York’s “authorities problem” have been suggested. The Millstein commission offered two: “constitutional debt reform[,] or designating one authority to issue all state related debt.” 94 The difficulty inherent in either

94 NYSCPAR Report, 13.


Public authorities are

so thoroughly enmeshed in

state finances through the

growth of their state-supported

debt that they are not simply

“creatures of the state,” but

an integral part of the

state.

40

is Article VII, Section 11 of the state’s constitution. That article specifies:

no debt shall be hereafter contracted by or in behalf of the state, unless such debt shall be authorized by law, for some single work or purpose, to be distinctly specified therein. No such law shall take effect until it shall, at a general election, have been submitted to the people, and have received a majority of all the votes cast for and against it at such election nor shall it be submitted to be voted on within three months after its passage nor at any general election when any other law or any bill shall be submitted to be voted for or against.

This provision was adopted, as noted earlier, in 1846, following calamitous experience with state indebtedness to build the Erie Canal and railroads. One can easily imagine the scope of taxpayer revolt were the legislature or a state constitutional convention to suggest revising the constitution in order to legitimate the amount of state-supported authority debt ($43 billion in 2004-05, according to Alan Hevesi’s estimate), which was contracted without any referenda being held. The same objection would hold in designating one public authority to issue all state related debt: issuance of such debt would have to be in accordance with Article VII, Section 11.

Another suggestion offered is to dissolve the authorities and absorb their operations into relevant departments of the state’s government. For example, the Department of Transportation would take over operation of all facilities and services of the New York State Thruway and Metropolitan Transportation Authority. All outstanding debt, including state-supported debt, would be shifted through an accounting transaction to the state’s debt ledgers and paid off through collection of user fees and taxes.

Again, the difficulty with this proposal is the one noted above: the state would have to tell its citizens that they are now responsible for what in 2004-05 was an estimated $43 billion of the authorities’ state-supported debt, but an additional $114 billion of bonded indebtedness assumed by the authorities — none of it contracted through the mechanism set forth in the state’s constitution.

Even were the constitutional limitation on contracting debt overcome, a second difficulty would arise: the likelihood of intense regional competition for budget allocations to conduct programs and services (formerly) conducted by the authorities. The misconception that, for example, the MTA’s operations are wholly underwritten through bond sales, user fees, dedicated revenue streams and limited annual appropriations by New York City and Albany, allows everyone in the state to believe that the cost of those operations impact only downstate residents likely to use the MTA’s services. This is a useful fiction, because it allows upstate residents (say, in Buffalo), who do not use those services, to believe that their wallets are unaffected. Disabused of this fiction were the authorities to be absorbed into the state, funding for public works and economic development programs would likely be paralyzed by regional competition for state revenues.

A venerable political adage advises, “If it ain’t broke, don’t fix it.” New York’s public authority system is not broken. But this monograph attempts to demonstrate, it needs fixing. The reform effort of 2003-2006 was in the end constrained by New York State’s

A venerable political adage advises, “If it ain’t broke, don’t fix it.” New York’s public authority system is not broken. But it needs fixing.


41

long-standing political stalemate between its executive and legislative branches. Detailed legislative proposals for increased oversight and regulation, drafted by former Comptroller Alan Hevesi, with support from former Attorney General Eliot Spitzer, were blunted by former Governor George Pataki’s predisposition, supported by the state Senate, to rely on self-regulation and to maintain executive branch prerogatives in appointing public authority board members. Renewed attempts to enact public authority reform in the same manner are unlikely to succeed so long as such stalemate continues.

There is, however, one model for reform through legislation that may well succeed. That model is appointment of a commission to review the Hevesi-Spitzer proposals that would recommend reforms based upon those proposals, and arming the commission with a mandate to guarantee that its final report will become law if neither house of the legislature votes to reject its report.

This was the model employed in 2005-2006 by the so-called “Berger Commission,” formally known as the Commission on Health Care Facilities in the 21st Century, and chaired by Stephen Berger, which was charged with providing a blueprint for changing the way New York State funds support of health care institutions.95 Until creation of the commission, reform of support for the state’s health care providers was paralyzed by the contending interests of the industry’s hospitals, insurers, professional associations and unions. All of these conflicting interests stymied decision making whenever the legislature considered the issues involved. During the course of its life, the commission solicited and received extensive testimony from each of the interest groups involved, as well as from the public, in a series of regional meetings. After its report was submitted in December 2006, the legislature greeted its recommendations with occasional consternation and some hesitations; but neither house voted to reject it, and the commission’s recommendations became law.

Given New York State’s continuing political gridlock, another commission similar to the Berger commission appears to provide the only practical means to secure meaningful and effective public authorities reform. The challenges the authorities pose to the administrative and financial health of the state were made clear during the course of the previous effort to affect change. So, too, were the most effective solutions. New York will do best to implement those reforms before, rather than after, economic circumstances beyond Albany’s control force its lawmakers to set in order the administration and financing of the state’s public authorities.

— September 20, 2008

95 In the interest of full disclosure: The wife of the author of this monograph, Janette Simms, was a member of the Berger commission’s staff.


New York will do best

to implement reforms before,

rather than after, economic circumstances

beyond Albany’s

control force its lawmakers to

set in order the administration

and financing of the state’s

public authorities.

42

Previously Published

The Nexus of Money and Power in AlbanyAn Agenda for Reform

Blair Horner

Special Adviser on Policy and Public Integrityto the New York State Attorney General

October 2007

A See-through Budget For the Empire StatePromoting Responsibility Through Transparency

edmond J. mcmaHon

Senior Fellow, Manhattan Institute for Policy Research,Director, Empire Center for New York State

March 2008

Can Direct Democracy Cure Albany’s Gridlock?Lessons from California

JosHua spivak

Research Fellow, Hugh L. Carey Center for Government Reform

April 2008

The Hon. Jerome and Helene Berg Public Policy Papers on Government Reform


The Hugh L. CareyCenter for Government Reformat Wagner College

Dr. Seymour P. LachmanDirector

Adam SimmsSenior Research FellowSenior Policy Analyst

Joshua SpivakResearch Fellow

Susan RosenbergAdministrator

The Hugh L. Carey Center for Government Reform at Wagner College conducts non-partisan studies and proposes ways to improve legislative and administrative effectiveness..

Wagner CollegeOne Campus RoadStaten Island, New York 10301

Tel: [email protected]

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New York's 'Secret Government'

News & Politics

Transcript of New York's 'Secret Government'