Weighing Consolidation and Dissolution of Local Authorities

New York state is advocating and may provide funding for the elimination or consolidation of defunct, duplicative and dispensable local authorities

With the advent of the new administration of Governor Andrew M. Cuomo and following the adoption of several recent statutes relating to compliance and municipal consolidation, New York state is increasing the level of scrutiny on the hundreds of state and local authorities spread across the state and calling for governmental consolidation and the implementation of efficiency measures at both the state and local level.  Both measures are designed to eliminate governmental redundancy, increase transparency and accountability, and also reduce the long-term, on-going cost of government. In furtherance of these goals, the state also appears willing to provide grants to municipal governments across the state to defray all or part of the costs associated with studying these efforts. This environment has created the perfect storm for municipalities across the state to potentially access much needed funding to review their operations as well as the operations of local authorities established by the state legislature to benefit individual municipalities or a region, and/or those local authorities that have been formed at the local level, including not-for-profit local development corporations.

Background – Taking Stock of Local Authorities
In its Final Report of the Commission on Corporations, Commissions and Authorities, 2010, Recommendations for Continuing Legislative Reform of Public Authorities, the New York State Assembly Commission on Corporations, Commissions and Authorities (the “Commission”) calls for the elimination of hundreds of authorities across the state. The Commission places these authorities into one of three categories: those authorities that are (i) defunct and no longer operating, (ii) duplicative and serve a similar function as another entity or organization and (iii) that have been created to provide functions that fall outside of the core mission of government.  Generally, local authorities are defined under Section 2 of the Public Authorities Law (“PAL”) to include any (i) public authority or public benefit corporation created by state statute whose members are not appointed by the Governor of the State; (ii) not-for-profit corporation affiliated with, sponsored by, or created by a county, city, town or village government; (iii) local industrial developmental agency or authority or other local public benefit corporation; or (iv) affiliate of such local authority. This relatively broad definition includes all local and regional Industrial Development Agencies (“IDAs”), Urban Renewal Agencies (“URAs”), Community Development Agencies (“CDAs”), housing authorities, parking authorities, solid waste commissions, regional water and sewer authorities and public benefit corporations, and many local development corporations (“LDCs”), which are established as private, not-for-profit corporations with special purposes and powers provided under Section 1411 of the Not-for-Profit Corporation Law (“N-PCL”) of the state. 

Entities falling under the definition “Local Authority” established by PAL Section 2 are now required to adhere to the various reporting, transparency and accountability requirements contained within the Public Authorities Accountability Act of 2005 (“PAAA”) and Public Authority Reform Act of 2009 (“PARA”). Prior to the adoption of PAAA, and more recently PARA, local authorities were not tasked with any broad reporting or accountability standards. However, these new statutes, along with their establishment of a new Authority Budget Office (“ABO”), have codified enhanced accountability, transparency and reporting practices by local authorities – and at the same time, the new PAAA and PARA requirements have also had a direct impact on budgetary, mission and human resources for many local authorities that historically have been governed and staffed by unpaid volunteers or ex officio elected and/or appointed local government officials. To be certain, the expanded legal, accounting and staffing costs required to properly adhere to PAAA and PARA requirements have led many local authorities to seriously question their long-term ability to shoulder operating costs.

In many instances, a municipality may not even be aware of a local authority under its control due to the fact that a local authority was created many years ago by or for the benefit of prior administrations. The state legislature established many special purpose public benefit corporations to address then-perceived or actual problems or challenges facing local governments – a parking or housing shortfall, a waste management issue, water or sewer mandate or shortfall, or perhaps an urban blight issue. In addition, many municipalities, or a municipal official or private individual or concern (and sometimes a mixture thereof) have over the years established special and general purpose LDCs under N-PCL Section 1411 to address broad and/or specific local and/or regional needs – whether general economic development matters, or a single project-purpose vehicle to assist local government develop a capital project. Oftentimes, a capital project may never come to fruition or conversely, a local authority may have achieved its goal of deploying a capital project or program that has run its course (through the retirement of debt, disposition of asset, or discontinuance of programming) and the entity remains in existence, but without purpose or mission. Even where a local authority continues to administer some program or purpose, the new PAAA and PARA requirements could have the effect of making the entity insolvent for lack of capital resources or programmatic income.

With the foregoing in mind, it is imperative that each municipality conduct a thorough analysis and gain a fuller understanding regarding the local authorities that have been established and exist for its benefit. This proactive approach to assessing local entities in advance of any action mandated by the state might save such municipality from unnecessary costs, undue scrutiny or enforcement by the ABO, as well as position a municipality as a leader in the area of governmental efficiency.

When taking stock of existing local authorities, municipalities need to identify and understand the nature of each in order to properly weigh and deliberate how each could possibly be restructured, consolidated or dissolved.  To the extent that one or more dormant or underperforming public benefit corporations are identified, an assessment needs to be undertaken regarding (i) statutory dissolution thresholds or requirements; and (ii) the assets and liabilities that the subject entity has accrued since establishment. For example, a seemingly dormant local parking authority or urban renewal agency may by operation of law already be deemed “dissolved” by virtue of failing to have bonds outstanding at a certain point during its existence. Or, if the entity did have bonds outstanding and continues to exist, an act of the state legislature may be required to undertake dissolution. As each entity’s dissolution requirements are weighed, municipalities must also carefully investigate and consider the assets and liabilities that a local authority may have accrued since its establishment. This investigation, which could include review of prior audits and entity transactions, would help the municipality understand what is owned, what may be owed, and/or what liabilities the entity may or may not have accrued. This is a crucial investigation, in as much as the dissolution of many local authorities results in the disposition of assets and liabilities to the entity’s benefited municipality. This “inheritance” following dissolution could be a double-edged sword – a municipality could identify long-dormant or underutilized assets including fund balances and real estate – however, real estate could be significantly contaminated or be tied to unknown covenants or legal liabilities.

Taking stock in underperforming or dormant LDCs can be a challenging exercise as well. In order to effectuate typical merger and dissolution activities for a not-for-profit corporation, it is necessary for active involvement by and approval of its current members and directors. In instances where an LDC has not actively held organizational meetings or conducted activities in many years (and sometimes decades), it can be very difficult, if not impossible to assess its assets and then initiate merger or dissolution activities in accordance with the N-PCL.

Identifying Ways to Help Reduce or Consolidate
In addition to the proposals advanced by the Commission, Governor Cuomo advanced similar proposals in his State of the State Speech. Included among the many proposals designed to reduce the cost of government and eliminate redundancies is the plan to reduce state agencies, authorities and commissions by 20 percent. In addition, the governor calls for providing Re-Org Empowerment Grants to the municipalities across the state of up to $100,000 to cover all or part of the costs associated with studies to merge or consolidate local governments. Assuming the state legislature adopts this proposal, this offers a municipality the unique opportunity to obtain much needed funding to offset the costs associated with assessing its situation vis-à-vis the local authorities under its control and implementing measures designed to increase governmental efficiency and eliminate waste.

Short of receiving a state grant or other financial incentive to effectuate consolidation or dissolution efforts, municipalities may be able to identify capital resources and/or other budgetary efficiencies to pay for necessary investigations and/or dissolution activities, including capital resources of the entity being dissolved, or budgetary resources of a surviving entity that will assume the assets.

Options for Municipalities and Local Authorities
Recent investigations and scandals regarding local authorities are making it increasingly difficult for municipalities to maintain the status quo and leave underserving and/or dormant entities unattended. Failure to take stock could subject a municipality to negative attention due to the failure to comply with PAAA, PARA or other state laws and/or increased audit and legal costs; presumably something each municipal leader seeks to avoid. Thus, it is strongly recommended that each municipality at a minimum identify all relevant local authorities under its control and review for redundancy and significance to its core mission. It may seem as if a defunct local authority carries no cost to a sponsoring municipality, however, the recent adoption of PAAA and PARA, along with a statutorily tasked ABO imposing new and more comprehensive reporting and operating requirements on local authorities comes with a significant annual price tag. Indeed, local authorities are required to have board members undergo ongoing training, make annual operating and budget disclosures to the ABO, conduct enhanced annual audits, maintain a website and adopt a comprehensive list of policies and procedures just to name a few of the new requirements.

The ongoing additional costs associated with meeting these requirements can have significant detrimental impacts on a municipality and its local constituent boards – especially in a time when resources are scarce and many programs are starved for operating resources. However, in addition to eliminating compliance costs driven by dormant and/or underperforming local authorities, there may be opportunity savings realized as well.  In other words, by reducing the number of local authorities under its control, municipal staff time directed toward completing and filing the mandated reports, maintaining a website, coordinating the completion of an annual audit and complying with the various other requirements for such authorities could instead be directed toward fulfilling the many other responsibilities facing local governments. Therefore, each municipality should take stock of its local authorities and a cost benefit analysis showing that the costs of maintaining them is outweighed by the gains attributable to their purpose and function.

Once a municipality completes an analysis of existing local authorities and their respective missions, purposes and respective assets and liabilities, efforts can be made to identify the required manner in which to undertake beneficial consolidation and/or dissolution activities to realize the intended efficiencies. This exercise should be carefully undertaken to not only avoid the unintended consequence of assuming liabilities, but also with an eye on retaining fundamental and important local powers, including economic development powers vested within IDAs. Once local officials conduct this analysis and if it is determined that a local authority is no longer operating, performs a service similar to another entity or performs a service outside of the municipalities core mission, efforts can be made to either dissolve or merge entities into another qualified entity. The procedures for each of a dissolution or merger will vary, and in many instances can be accomplished relatively quickly and inexpensively. However, the procedures required will depend on the type of entity identified for dissolution or merger, ranging from relatively simple non-Judicial dissolution of an LDC with less than $25,000 in assets, to some situations requiring home rule legislation for dissolution of IDAs, URA and other statutory creatures and/or undertaking regulatory audits by and securing approvals from state and/or federal agencies where an entity previously administered programs and/or funding.

When dissolving an LDC with assets in excess of $25,000, the process includes (i) drafting a plan of dissolution describing the treatment of the assets and liabilities of the entity in accordance with the N-PCL, (ii) obtaining the necessary director and member consents for the plan of dissolution, and (iii) obtaining sign off from the New York State Attorney General and a local Justice of the New York State Supreme Court. For those local entities that have assets less than $25,000, attorney general and supreme court approvals are not required for the plan of dissolution, however the entity must file an appropriate certificate of dissolution with the both the attorney general and the supreme court. 

The option to merge one or more LDCs may be attractive to provide a municipality or region with meaningful operational savings for compliance and ongoing operations. In addition, the merger process could have the effect of aggregating or pooling assets of local authorities to assist in long-term, efficient deployment of shared purposes and powers under a single umbrella organization. In instances where local analysis establishes that merger of an LDC is preferred over dissolution, the merger process under the N-PCL requires similar director, member, attorney general and supreme court approvals, however, hands-on legal and accounting guidance is required because there are many provisions that must be followed based on the specific facts of a particular merger. 

The state appears to be making governmental efficiency and consolidation a high priority and is urging municipalities to eliminate defunct, duplicative and dispensable local authorities under its control. This elimination can be accomplished via merger or dissolution. Those municipalities that take heed of this call stand to position themselves as a leader in the area of governmental efficiency and might be able to access state funding to offset the costs attributable to any actions taken in respect thereof.

For more information regarding the dissolution or merger of a state or local authority please feel welcome to contact Christopher Andreucci at (585) 419-8606 or candreucci@harrisbeach.com, Justin Miller at (518) 701-2710 or jmiller@harrisbeach.com, members of the Harris Beach Municipalities and Quasi-Governmental Agencies Industry Team and the Public Finance and Economic Development Practice Group, or the Harris Beach attorney with whom you usually work.

This legal alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York state, including Albany, Buffalo, Ithaca, Lockport, Long Island, New York City, Niagara Falls, Rochester, Saratoga Springs, Syracuse, Yonkers, and White Plains, as well as Newark, New Jersey, and New Haven, Connecticut.