Public-Benefit Corporations, or Public Authorities

Introduction to Public Authorities
Municipal governments issue municipal debt. But because of municipal debt limits across the country, many municipal governments cannot issue enough debt to meet their perceived capital needs. To fulfill this perceived need, many municipal governments created public-benefit corporations, or public authorities.

Public authorities are complex, quasi-public entities. They are public in the sense that they are created via a legislative statute, which defines their mandate and enables them to execute certain functions on behalf of the government – similarly to public agencies. They are legally separate from the government, however, and are considered “government corporations” instead of just extensions of the government – unlike public authorities. This independence allows them to engage in activities outside regular governmental oversight. For example, they are largely self-supporting, may contract debt and other services with other entities without government approval, and do not have their independent finances reported in municipal Comprehensive Annual Financial Reports (CAFRs). Their formal oversight comes from independent Boards appointed by government officials – not elected by citizens, though in some states, like New York, municipal Comptrollers are allowed to review Public Authority contracts.

Various levels of municipal governments utilize public authorities differently. They do so for a couple of reasons, including but not limited to: As a result, the existence and use of public authorities across the United States varies, though most states do utilize them.
 * 1) Some states, like New York, have stricter debt limits, making it difficult for them to issue enough debt to meet their perceived needs.
 * 2) Some states, like states in the Northeast United States (New England), have older infrastructure, making their perceived need for debt to improve capital assets greater.
 * 3) Some states have larger social safety nets that require more public assets and infrastructure, such as public housing for the homeless.

Controversy: the New York State case study
Public authorities can be controversial in public finance, since municipalities may choose to use them to circumvent constitutional or statutory debt limits. Similarly, though an Authority is generally self-supported through user-fees, it still does operate on behalf of a government, and some of its debt may be contingently backed by a governmental guarantee. As a result, it can be hard for governments and analysts to determine what is the accurate level of debt for a certain municipality, and what is a good limit to assure debt affordability.

To better explain this nuance, take New York State as a case study. New York State is prolific in its use of public authorities for municipal financing. As of fiscal year 2015, 94% of all long-term debt outstanding for which the New York State government (or, more appropriately, the New York State taxpayer) pays debt service was issued through public authorities (see chart 1); this proportion has been 90% or higher since 2004.

Debt issued by public authorities differs from traditional general obligation debt - debt backed by the full faith and credit of the state government - in that it must be appropriated by the state government into the budget each year before the state will pay the debt service. Consequently, it is not considered full faith and credit debt, even if the state enters into a contract with the public authority promising to appropriate all debt service funds for a debt's repayment. Taken together, these form what the state calls state-supported debt, or all debt which the state has a constitutional or contractual obligation to pay.

New York lawmakers use public authorities because the constitutional mechanism which allows them to issue general obligation debt is very limiting. All debt issued must be approved by the electorate at a general election only, meaning all proposals must come before the voting public at once. As a matter of politics, residents are more willing to support spending on some programs over others; it is easier to get the public to support spending for education than prisons. As a matter of preference, residents are more willing to accept spending with smaller price tags. Unfortunately, municipalities must still build prisons, and if a state can only get approval to issue debt once a year the price tag for that bundle will inevitably be high. As a result, it has been difficult for New York to get voter approval for all programs they deem necessary, and by the mid-1900's the state began utilizing public authorities as a way of circumventing the constitutional debt limit.

The justification for a strict debt limit is understandable. Between 1821 and 1846, New York State financed a slew of public works projects, some very successful - like the Erie Canal - and some not so successful, on behalf of private contractors. As a result, New York's debt level ballooned. 3/5ths of all debt issued was on behalf of private contractors building public-benefit infrastructure, and as a result the government was being forced to pay off debt for private companies that defaulted when their projects went belly-up. Many of these were risky propositions - the federal government denied the state's request to help fund the Erie Canal because it seemed like an impossible feat - and after the initial "canal-building boom" ended New York residents voted to amend the state constitution to require the public approve all debt issued via referendum. Though it was undoubtedly successful in curbing the pace at which New York incurred debt for a time, it also made it necessary for New York to find other methods of financing capital works projects.

Because of the existence of public authorities, the debt instruments available to the state to fund capital projects are manifold. Each instrument imposes a different liability upon the state: some, like appropriation-backed bonds, are direct obligations of the state as soon as the government appropriates that debt payment into its budget. Others, however, impose a contingent obligation - a guarantee that the state will pay back the debt should the authority lack the necessary funds - upon the state. There is no explicit guarantee that the state will have to pay that debt service, unlike with appropriation-backed bonds, leaving it in a murky area of being a potential-but-not-guaranteed liability. This does not take into consideration the volume of authority debt issued which is not backed by the State government - such as fare-backed bonds for the MTA - but which still impacts residents through altered service operations and increased user-fees.

As a result of the ease with which public authorities could issue debt on behalf of the government, state-supported debt ballooned. Between 1986 and 2000 alone, authority-issued debt outstanding grew by 434% compared with general obligation debt, which only grew by 25%. In 2001, the New York State legislature passed the Debt Reform Act which limited the total of state-supported debt outstanding to 4% of the state's annual personal income, and limited debt service to 5% of the state's annual general revenues. It did not impact the amount of contingent debt authorities could issue.

The fact that so much debt is issued by quasi-public entities outside constitutional limits is problematic.First, state voters do not get a say in the debt that is issued by public authorities, and often do not even know the debt has been issued until after it shows up as a budget appropriation. Second, with so many types of bonds being issued with varying degrees of state liability, it is difficult to assess how indebted the state really is.

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