Task force on public authority reform says those appointing board members also owe fiduciary duty; warns boards against reliance on senior staff

As I reported last month, despite the expansion of the Authorities Budget Office (ABO) as part of 2009 public authority reform legislation, corporate governance expert Ira Millstein, who led the development of the law, thought the ABO was woefully understaffed.

This week, the Governor’s Task Force on the Implementation of the 2009 Public Authorities Reform Act (PARA), chaired by Millstein, issued a report (embedded below) calling for “substantial increases to the funding and staffing of the ABO.”

But it also called for several other reforms, a few of which seemed to be a response to situations like Atlantic Yards.

Notably, the Task Force wants:

• those who appoint board members to face a fiduciary duty (which means they'd owe loyalty, for example, to transit riders rather than real estate developers)
• board members limit reliance on senior staff (who, in the case of AY, run Empire State Development Corporation policy)
• boards to implement risk management polices (which might lead the ESDC to produce an cost-benefit analysis that allows for delay)

Expanded fiduciary duty

As a main recommendation, the Task Force asks that “the ABO take action to ensure that the individuals responsible for appointing and designating directors to the boards of public authorities respect the fiduciary duty owed by their appointees and designees; and that the Public Authorities Law be amended to establish a fiduciary duty owed by the individuals holding appointing and designating powers.”

In other words, just because (for example) Mayor Mike Bloomberg appoints members of the Metropolitan Transportation Authority, he should recognize his appointees should be responsible to the interests of the MTA, not the interests of the mayor.

That would be a significant change, given that Bloomberg's appointees led the justification of the MTA's June 2009 renegotiation of the Vanderbilt Yard deal. The recommendation is why the New York Times headlined its coverage Political Meddling Harms Public Authorities, Albany Panel Finds.

The Times found Bloomberg’s office unready to comment. Gov. David Paterson issued a statement praising the task force but commenting mainly on the diversity issues in the recommendations.

Need for enforcement

In both the Times and the Albany Times-Union, Millstein suggested that ABO Director David Kidera should be more aggressive at enforcement.

There are likely several authorities worth looking at for egregious abuses, which means that the Job Development Authority is probably down on Kidera’s list, but the ABO has said nothing about the latter’s failure to file an annual report or mission statement.

Task Force: most board members diligent

The task force conducted outreach, meeting--for both educational and fact-finding purposes--with the boards of directors of the Empire State Development Corporation, NYC Industrial Development Agency, Dormitory Authority of the State of New York, and four others:

The Task Force has concluded that a vast majority of the board members serving on these public authority boards are diligent, competent and hard working, especially in light of the fact they are not compensated. The Task Force has given considerable weight to their invaluable experiences, comments and suggestions in the formulation of its recommendations and conclusions.

Well, most may be competent and prepared, but not all, as we learned at an ESDC board meeting in December 2006 (video).

The need for fiduciary duty

According to the report, the fiduciary duty is even more crucial for public authorities:

Public authorities are corporations independent of the State, and their boards, much like the boards of all corporations, public and private, are the bodies responsible for the efficient, effective, fair and honest execution of their respective missions. Public authorities differ, however, in that they have no shareholders, and thus, no one to enforce the fiduciary duties of the directors. Over the years, the Delaware courts have articulated and enforced fiduciary duties of directors under state law on a case-by-case basis. This body of law has become the backbone of best practices for boards of public corporations. In recent times, it has also been recognized as applicable to not-for-profit corporations, irrespective of the fact that not-for-profit corporations have no shareholders, on the grounds that they have identifiable constituents that are highly dependent on them. If anything, the case is even stronger for public authorities—the identifiable constituents in this instance are the citizens of the State and the resources public authorities expend, are the State’s resources.

The appointment process

The report suggests that board members aren't quite clear to whom they owe loyalty:

It is the opinion of the Task Force that the majority of public authority board members understand and appreciate the underlying premise— that their fiduciary duty is owed to the public authority for which they serve. What is less clear to board members, is whether, or to what extent, appointees’ and designees’ decision-making should be controlled by the interests of those parties responsible for appointing or designating them to public authority boards. The majority of public authority board members are appointed by a state or local official, or hold the board seat in an ex officio capacity or as an appointed designee of an ex officio board member. As such, appointees, ex officios and designees are susceptible to the interests of the person or entity responsible for appointing or designating them to their respective public authority board. This susceptibility must be curtailed, and the independence of appointees and designees safeguarded, to ensure that board members of public authorities are fulfilling their fiduciary duty obligations and acting in the best interests of the public authority for which they serve.

(Emphasis added)

"Troubling" accounts

In pointing to potential abuses, the report is discreet, but could have been talking about the revision of the MTA deal:

The Task Force is troubled by some accounts of instances where an appointing or designating party has attempted to control the decision-making of an appointee or designee and requested such appointee or designee to act in the interest of the appointing or designating party. Ex officios and designees were often surprised to learn that their fiduciary duty is to the board on which they serve rather than to the individual who designated them to their position or the interest of the agency or entity that employs them. This type of behavior is unacceptable and a direct violation of the law. PARA is explicitly clear on this point... This is not to say that an appointee, ex officio, or designee, or any other board member for that matter, is precluded from considering the input of individuals outside of the public authority, including appointing or designating parties... Those views can inform the decision of a board member, but they cannot dictate that decision.

Staffing issues

While the 2010-11 adopted State Budget authorizes an increase in staffing from seven to eleven full-time positions, other other oversight, regulatory or investigatory agencies have far more staffers, as indicated in the chart at right.

“Meaningful enforcement of PARA requires investigators, lawyers and program staff,” the report states. The Task Force recommends that the ABO have 30 positions, nearly three times the current total of 11.

Risk management

The report states that some authorities conduct risk management, but many don't:

A number of these public authorities, both large and small, state and local, directly impact the health, welfare and safety of New York citizens on a daily basis through the provision of bridges, tunnels, roads and other services, such as hospitals, electricity and waste removal facilities. The failure of these public authorities to properly assess the risks associated with their operations would likely result in serious consequences for the public at large. Despite the potential severity of the risks involved, the Task Force found that some of these public authorities did not have a risk assessment or risk management or risk committee in place at the board level. We should note that the New York State Thruway Authority has provided the Task Force with a detailed description of its risk assessment and risk management procedures – evidencing a clear appreciation for its role in preserving the safety and welfare of State’s citizens. ... In the last year, the SEC promulgated enhanced regulations requiring public companies to disclose their risk assessment and risk management policies and practices as part of their annual proxy statement filings. These regulations address a number of issues including credit risk, liquidity risk and operational risk.

So risk assessment involves both financial calculations as well as operational ones. What about the risk of delay on projected revenues for projects like Atlantic Yards?

As I wrote in February, the ESDC did not calculate the impact on tax revenues from a project that takes more than a decade to build, though that's a virtual certainty.

Limit board reliance on senior staff

It is apparent--see coverage of the September 2009 board meeting--that the board members of the ESDC defer to senior staff, and the report seems to acknowledge such situations:

The Task Force recognizes the potential for public authority boards to defer to senior staff in the discussion and evaluation of matters submitted for board approval. However, public authority board members must not defer to staff as a courtesy or time management tool or to accelerate the pace of board meetings. It is part of each board member’s fiduciary duty to question and evaluate both the materials presented to the board and the rationale behind the proposals made by management. In our meetings with certain public authorities, board members stated that given the amount of nuanced data and important issues at stake, staff should not be micromanaged. The Task Force concurs. However, it is the board’s obligation, serving as a whole and through its committee structure, to satisfy themselves that staff recommendations comport with the facts, circumstances and mission of the public authority. To do less may be an abdication of the board’s responsibility and a violation of its fiduciary duty. It is the recommendation of the Task Force that the ABO issue additional policy guidance on the obligation of board members to actively evaluate and question the management of the public authority, in particular, the proposals submitted by senior staff to the board for approval.

As in, say, evaluating whether Atlantic Yards might take “decades”?

The PACB

The report even recommends modification of the Public Authorities Control Board:

The Public Authority Control Board (“PACB”) was established in 1975 to review and approve selected state public authority borrowing, but certain state public authority borrowing and all local public authorities are exempt from PACB review. However, it has been contended that the PACB has been used as a way to promote political agendas. The PACB might be modified to establish a non-partisan body to oversee and rationalize all state public authority borrowings of state supported debt, as described above.

“It has been contended” sounds like a backhanded description of Assembly Speaker Sheldon Silver’s decision to scotch the West Side Stadium.

The history

The report lays out the history behind public authorities:

The creation of a large number of public authorities in New York State in the twentieth century was, in large measure, a response to an amendment of the New York Constitution in 1846, mandating that all future issuance of general obligation state debt for a specific capital purpose be done through public referendum, once per election. Such a requirement was clearly too cumbersome for a modern society needing to address critical public functions, including the development of health and hospital facilities, roads, bridges and mass transportation, along with other governmental facilities. Thus the use of public authorities to accomplish the vital infrastructure needs of the state continued to expand throughout the twentieth century, first under urban-planner Robert Moses, and then under Governor Nelson Rockefeller throughout his gubernatorial term. Governor Rockefeller, confronting deteriorating infrastructure, higher education and urban housing, sought public approval of referenda to incur debt. The approved amounts, however, were never sufficient to accomplish the intended purposes and, eventually, the public largely declined to approve the referenda. The Governor decided to look to public authorities for revenue streams to support the state’s needs, thereafter, reliance upon public authorities to support the State’s infrastructure and provide public services expanded and likely will for the foreseeable future. With the increased size and scope of governmental responsibility came an increase in the amount of debt issued by the public authorities. New York public authorities are now responsible for approximately 93 percent of the State’s indebtedness if moral obligation and full faith and credit debt are included.

Work continues

The Task Force will continue its work until the end of the Governor’s term of office, so maybe it will have some more to say.

New York State Task Force on Public Authorities Report