Monday, June 08, 2009

Brodsky: MTA board’s acceptance of Ratner’s lesser offer for railyard would violate its fiduciary duty

Assemblyman Richard Brodsky, who chairs the state Assembly Committee on Corporations, Authorities, and Commissions, warned last week that, if the Metropolitan Transportation Authority (MTA) board accepts “less money” for the property destined for the Brooklyn arena, it would “be a violation of the fiduciary duty”--their obligation to act with the highest standard of care.

Forest City Ratner, which agreed to pay $100 million for the MTA’s 8.5-acre Vanderbilt Yard, has reportedly offered only $20 million upfront for the segment of land it needs for the arena, with the rest to be paid at some later date. The MTA board meets June 24.

Brodsky, who has applied tough scrutiny to the Yankee Stadium deal, has remained mostly agnostic about Atlantic Yards--some believe it's an unwillingness to tussle with Assembly Speaker Sheldon Silver, an AY supporter--but his remarks last week indicate some concern.

Ratner's deal

The Vanderbilt Yard was appraised at $214.5 million, which included the bidder’s cost of a replacement railyard.

FCR claimed that noncash elements, including the replacement yard--the cost of which still should’ve prompted bidders to pay $214.5 million, according to the MTA’s appraiser--upped the value of its bid.

Those elements would be attenuated, as well, given FCR’s plan to build a replacement railyard with seven tracks rather than nine, as originally promised.

At the 5/4/04 City Council hearing on Atlantic Yards, Jim Stuckey, then FCR's point man on AY, pledged a fair payment:
[F]or the land, the public land, the MTA land, is that, what we have agreed to is that we will lease or buy that land at the fair market value... by whatever independent process that they normally use.

FCR’s MTA deal is a crucial prelude to the building of the Atlantic Yards arena and the project as a whole; only when the payment is in place would the Empire State Development Corporation (ESDC) proceed with eminent domain.

Loss of Ratner funds could hurt straphangers

The lowered payment could, in fact, affect subway service.

When, at the May 29 state Senate oversight hearing, Assemblyman Hakeem Jeffries questioned the MTA’s willingness to accept the deal, given fare increases and service cuts, MTA Acting Executive Director Helena Williams noted pointed out that the money was destined for capital expenses, not operating ones.

I suggested it was a bit of grandstanding, but maybe Jeffries was right.

After all, former MTA Chairman Richard Ravitch, in a June 3 article in the New York Post, said monies from a new payroll tax destined for capital projects likely will have to be used in next year’s operating budget--and that the agency would have trouble funding capital projects like the Second Avenue Subway.

Conference on authorities; fiduciary duty issue

Brodsky’s comments came last Wednesday, June 3, during a conference hosted by the Government Law Center at Albany Law School. He also took particular aim at the Yankee Stadium deal, a topic of continuing scrutiny by his committee.

The comments below are excerpted from several different segments of the conference , titled "The Proposed Legislation to Amend the Public Authorities Law: Maintaining the Balance Between Authority Autonomy and Accountability." (I was provided a copy of the podcast, which will be posted at the law school web site.)

Brodsky is a sponsor of A2209, which has the following purposes:
The bill would strengthen the Public Authorities Reform Act of 2005 by creating an Authorities Budget Office, prohibiting the creation of subsidiary authorities without legislative approval (with certain exceptions), making changes to the authority board's governing process, creating a fiduciary duty, enabling the comptroller to approve authority contracts, strengthening the rules on the disposition of public authority property, providing MWBE and creating whistleblower protections.

Among the provisions in the proposed legislation:
The Act will require authority boards execute an acknowledgment confirming that they understand their independence as a member and their fiduciary duties to the organization.

However, as discussed during the conference, Brodsky said the MTA board, at least, already has a fiduciary duty.

Delicate balance

Authorities like the MTA and the Empire State Development Corporation (ESDC), run by executive appointees, are currently responsible for more than 90 percent of the state’s indebtedness, as well as management of more than 85 percent of its infrastructure.

Brodsky’s fellow panelists--Luke Bierman, General Counsel, Office of the State Comptroller and Elizabeth Lynam, Deputy Research Director, Citizens Budget Commission--as well as moderator Scott Fein, Director, GLC's Public Authorities Project, were somewhat more positive than Brodsky about the performance of the authorities and the balance between their accountability to the public and freedom from political influence.

Do authorities work?

Moderator Fein said that, as a preliminary conclusion, “public authorities by and large work, but can work better.”

Brodsky took exception to that:
It depends on what you mean by work. They accomplish some of their obvious purposes well and truly. They run the [New York State] Thruway. But they are also the engine for the most disastrous set of economic, social, and political decisions that the government’s made over the last 25 years, like Yankee Stadium, like the failed rebuilding of downtown, like the inability to rationalize the funding for mass transit.

So, they’re not bad engineers, they’re awful social architects because there’s no democratic control of them, and they are operated as fiefdoms under the control usually of the chief elected officials who appoint them. We would be better off as a state if we didn’t have them.

(Emphasis added)

More control--or restructuring?

Brodsky was asked if he wanted more control, in in institutional sense, over public authorities.

He said the issue wasn’t control but structure:
It’s not about control. I respectfully disagree with Ms. Lynam about their independence. They are the most dependent agency in government, because they’re run by mayor and/or governor out of the second floor, out of the executive chambers, their boards are told what to do...

Have you ever seen a board of an authority stand up to a governor or mayor and say no? Mayor Bloomberg explicitly says he directs his board members how to vote. The reason they fail so broadly and completely is that there are no checks and balances as exist in a democratic construct, with a separation of powers.


There’s a legislature checking the governor. There’s a judiciary checking both. In an authority, what has happened is: governors appoint executive directors and/or chairs, and they run it.

This, I’d suggest, is a description of the ESDC board and leadership. And that suggests that the nearly complete judicial deference to the ESDC’s decisions should be reconsidered.

The advantage of revenue bonding

He continued:
And if you read editorials after their theoretical concern for things like accountability, in the end, they want decisions made. So what happens is, and this is what happens in every authority, when there’s a controversial matter, the executive director calls the governor’s secretary for public authorities and is told what to do.

Now I don’t think that’s much of a secret. The remedy then, is to take what Ms. Lynam calls their advantages, which is essentially the ability to do revenue bonding--we can’t do that, we have to go general obligation and through referendum--if you gave the state revenue bonding authority, you wouldn’t need these things. And the debt issuance, for example, would be much more clearly under the control of elected officials.


Soviet-style bureaucracies

Brodsky continued with some not-unfamiliar rhetoric:
So what you have a set of Soviet-style bureaucracies, where the Commissar-in-charge, under instruction from the Politburo, makes decisions that are ostensibly made in the interest and controlled by elected officials. That fiction is what governs much of the public debate, I don’t think it’s real. I can recite example after example.

And the reforms we’re doing are me backing off that essential big reform and saying, OK, let’s try to modify, we spent two and a half years and I got a little transparency. The fight we’re trying to fight now--for the additional stuff-- was being resisted by this governor like it was resisted by every other governor I’ve ever dealt with...

The governors resist this, and mayors resist this because they now have effective control. If you want to change that, you have to actually make them independent or make them dependent. What you have in this hybrid mix is completely unacceptable.


Failure of balance

Brodsky said that the structure is inherently unbalanced:
This is what happens when you don’t have a legislature and you have a king, and the king decides what’s going to happen, and sometimes the king is right. But we don’t know that often enough unless we have somebody else tapping on the king’s shoulder... with a department of the government, there’s a legislature, with an authority, there’s not. And the fight we’re having to get this bill moving is evidence of that. The governor’s resisting it.

I would point out that the heart of the bill that we first put it out... and what is perceived as the heart of the existing reform bill, is the question of fiduciary duty. That is to say, to whom does the authority owe a debt of loyalty, the board members? I took the aggressive legal posture, which was that we had to write it down in statute: you have a fiduciary duty. That’s what the bill this minute says.

MTA fiduciary duty

He continued:
I worked with a guy named Ira Millstein, who’s a corporate governance expert, and he kept tugging on my sleeve, saying, ‘y’know, they really already have a fiduciary duty.’ So when the MTA statute came up, the speaker and I conferred and we tricked the Senate and governor, and it worked.

So what we did in that statute is we added to the list of things for which a board member may be removed: violation of the fiduciary duty. Now the consequence of that is not huge in the legal sense. But it was huge in the political sense--I don’t mean partisan sense--in that it reminded everybody that the board members had a fiduciary duty.


On the MTA, where this has just been added, this is going to come up very quickly, because the Nets are going to ask the MTA to take less money for the Nets arena. I believe that the decision to accept that offer would be a violation of the fiduciary duty of the board members.
(Emphasis added)

Unaccountable boards & PILOTs

Brodsky segued from describing the MTA board to the New York City Industrial Development Authority, which approved the Yankee Stadium deal:
In the previous iteration, there was a chairman of the board, who had the powers of a CEO, and then there was an appointed executive director... You had Peter Kalikow and Katie Lapp, which worked well. I didn’t agree with everything Peter did, but on things like the Jets stadium, where the governor and mayor were saying, ‘we want this done, do it this way,’ Peter stood up.

If you look at this catastrophic Yankee Stadium deal, 12 people, you can’t name one of them, committed 4 billion dollars--well, actually 2.8 billion dollars, of public money to build a stadium at a time when we can’t finance the MTA. Now, who are they and how’d they get that power? They were told to by the mayor, and they did.

Note that city officials disagree with Brodsky that PILOTs are public money, but Brodsky’s criticism, (corrected; see comment below) not unlike that made previously by Neil deMause of Field of Schemes, was taken up last October at a Congressional hearing by Rep. Elijah Cummings.

Cummings addressed New York City Economic Development Corporation President Seth Pinsky: “Mayor Bloomberg and you seem to want it both ways. You tell city and state audiences that the stadium PILOTs are not in fact foregone tax revenues, but are instead private payments...Then you turn around and tell the federal government that PILOTs are tax revenues, and thus public money.

deMause's comment: I never said I agreed with Brodsky's analysis that the entire PILOT payments are a public subsidy. What I've said is that property tax breaks are a public subsidy, which is a very different matter - especially in a case like this one where the PILOT is just a paper fiction to get IRS approval of tax-exempt bonds.


Back to the Yankees--and Nets

In his final remarks, Brodsky pointed to a battle between the governor and legislature, and referred directed to the sports facility deals:
Governor’s resisting any effective mediation of his effective control, through the mechanisms we’ve discussed, of authorities. And the bill is limping along--we have a shot. But we’re getting quiet, smart, thoughtful, but uncooperative political stuff. If there’s any interest in anybody in reforming the system--that’s the next couple of weeks.

If we’re going to do this moderate change... and not abolish them, this is the time to do it. The heart of it is to revive and practice the existing legal concept of fiduciary duty. The consequence of not doing this is going to be catastrophic with respect to debt. Because this securitization model that they perfected for the Yankee deal--this is what they do. You can’t securitize the tax revenues. We can’t do that.

The PILOTs issue

He continued:
So you go ahead and create a PILOT--a payment in lieu of taxes. And that you securitize. And that’s what the [Yankee] stadium deal and the Mets deal and the Nets deal is probably going to be. That is diversion of tax money into debt without any elected officials looking at it. That is an extraordinary kind of thing.

And when the New York State government collapses under the weight of debt, it will be because of LDCs and IDAs and these little dinky things that are changing the face of the fisc of the state and the policies of the state. So my practical plea... tell the speaker, tell the majority leader, tell the governor that this bill, or something like it, ought to pass the session.

(Emphasis added)

Brodsky’s warnings about debt echo those made at the oversight hearing by Develop Don’t Destroy Brooklyn attorney Jeff Baker.

1 comment:

  1. I never said I agreed with Brodsky's analysis that the entire PILOT payments are a public subsidy. What I've said is that property tax breaks are a public subsidy, which is a very different matter - especially in a case like this one where the PILOT is just a paper fiction to get IRS approval of tax-exempt bonds.

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