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When should quasi-public entities be subject to governmental transparency requirements?

August 9, 2011

Determining when governmental transparency requirements should be applied to quasi-public entities has recently become an important issue in New York for local development corporations (LDCs), which are classified as either local public authorities or private nonprofits depending on how closely they’re related to local governments. The most recent decision on this issue is Griffiss Local Development Corporation v. N.Y.S. Authority Budget Office, where the Third Department found that the LDC was a local authority subject to the Public Authorities Accountability Act based on a number of factors, including the county’s sponsorship and funding of the LDC, the county’s redevelopment contract with the LDC, the LDC’s use of certain local tax funds, and the overall close relationship between the LDC and the county and municipal government.

However, there are no bright line tests and the law in New York is by no means completely clear regarding just what factors or combination of factors is necessary for an LDC to be considered a local public authority. In this context, looking at the law in other states can be particularly helpful, and two recent blog posts discuss the criteria used for applying governmental transparency requirements to quasi-public entities in North Carolina, Connecticut, and a few other states. Continue reading after the jump for analysis from Frayda Bluestein, Professor of Public Law and Government at the U.N.C. School of Government, and from Robert Wechsler, the Director of Research for City Ethics.

First, over at the North Carolina Government Law Blog, Frayda Bluestein recently posted some interesting thoughts about applying government transparency laws to private entities in the Tar Heel State. She begins by contrasting two hypothetical government contracts: one covers solid waste collection and is made between a city and a private company that’s otherwise unconnected to municipal government; the other covers community arts programs and is entered into by the same city and a nonprofit organization that has several city appointees on its board. Should the solid waste company and the arts organization be covered by the public records law, the open meetings law, and other government transparency requirements?

Bluestein answers no for the solid waste company, and yes for the arts organization. What’s the difference? She explains that:

Courts around the country have applied transparency requirements to private entities under several theories. Some jurisdictions focus on the fact that the private entity is carrying out a governmental function. Others base decisions on whether the government exercises such control over the private entity that it is should be treated as an agency of the government, rather than as an independent contractor…. The case law in North Carolina focuses on factors demonstrating extensive control, rather than on the exercise of a governmental function.

The leading case in North Carolina, she notes, is News & Observer Publishing Co. v. Wake County Hospital Systems, Inc., 55 N.C.App. 1 (1981), which involved a hospital that was originally a public authority and was later transferred to a private nonprofit. The court found that the hospital system was subject to the public records act because the county exercised significant oversight and control, as evidenced by 9 relevant factors:

(1) that upon its dissolution, the corporation would transfer its assets to the county; and (2) that all vacancies on the board of directors would be subject to the county’s approval. The lease agreement provided (3) that the corporation would occupy premises owned by the county under a lease for $1.00 a year; (4) that the county commissioners would review and approve the corporation’s annual budget; (5) that the county would conduct a supervisory audit of the corporation’s books; and (6) that the corporation would report its charges and rates to the county. The operating agreements also provided (7) that the corporation would be financed by county bond orders; (8) that revenue collected pursuant to the bond orders would be revenue of the county; and (9) that the corporation would not change its corporate existence nor amend its articles of incorporation without the county’s written consent.

“The markers of control are so much a part of the analysis,” Bluestein says, “that in a case where factors indicating significant control originally existed, but were removed by the time the case came to trial, the court held that the public records and open meetings laws did not apply. See Chatfield v. Wilmington Housing Finance & Development, Inc., 166 N.C. App. 703 (2004) (rejecting arguments based on the “governmental function” analysis).”

Nevertheless, there’s no bright line test, and Bluestein recognizes that the cases don’t really explain which factors or combination of factors are the most important. She offers the following hypothetical:

Consider… the various arrangements between city or county governments and volunteer fire departments (VFDs). Some VFDs are explicitly part of city or county government, while others are independent nonprofit organizations that operate under contracts with public agencies. Most VFDs receive the bulk of their funds from these contracts, and in many cases, they are supported by taxes levied specifically for the purpose funding the VFD. On the other hand, there is rarely the degree of control and oversight of a VFD that there was in the News & Observer case. Applying the factors in the case law, it seems likely that most VFDs would not be considered agencies of local government, though the combination of dedicated tax funds and the governmental nature of the function might cause a court to reach a different conclusion.

Bluestein notes, as well, that “similar situations exist with economic development commissions and other nonprofit organizations that carry out functions for local government with a mix of funding, appointment, staffing, and fiscal controls.” Moreover, resolving these cases is even more difficult because the North Carolina cases address only public records and open meetings laws—and the answer could be entirely different for the purposes of public bidding laws, conflict of interest laws, or budgeting laws, all of which have their own distinct purposes and definitions. Bluestein also points out that the application of these laws to quasi-public entities doesn’t necessarily reflect how much public money is involved—an issue that could very well be seen differently by taxpayers. She notes that local governments can provide more accountability in their own contracts, and that pending state legislation could also impose increased transparency requirements on nonprofit organizations that receive public funding.

Commenting on Bluestein’s article, Robert Wechsler makes some additional points in a post about Privatization and Transparency at CityEthics.org. While some states provide statutory requirements, as in Minnesota and Wisconsin, where public entities must include provisions in their contracts making it clear that records created pursuant to those contracts will be considered public documents, Wechsler notes that transparency rules remain rather opaque in many jurisdictions. In Oregon, for example, “public bodies avoid the reach of the public records law by contracting governmental functions out to private entities and not taking custody of records that relate to those functions. Oregon appellate court decisions address this problem to some extent, but only if the requester can show that the ostensibly private entity is the functional equivalent of a public body.”

Similarly, Wechsler says that Connecticut entities have been accused of using private contracts as a sort of “cloaking device” (à la Star Trek) to hide certain functions and expenditures from the public. Unlike North Carolina, the courts in Oregon and Connecticut use a “functional equivalence test” to determine when to apply governmental transparency requirements. Wechsler says that the four criteria for this test are:

  • whether the entity performs a governmental function;
  • the level of government funding;
  • the extent of government involvement in or regulation over the entity; and
  • whether the entity was created by the government.

As Wechsler notes, “all four criteria do not have to be present and, in some situations, an entity can be considered public for some of its functions and private for others.”

Wechsler also discusses a report from the Connecticut Freedom of Information Commission, which mentions three relatively new kinds of nonprofit entities that are often found to be exempt from transparency requirements:

One sort of nonprofit assists government, for example, a foundation that assists public universities. These foundations are allowed to provide perks to public officials that would not be permitted under state laws. They can also hire officials’ relatives.

Another sort of nonprofit operates government-funded facilities or programs, such as schools. These nonprofits are sometimes a way for organizers to make money from property they own, or take salaries far higher than would be provided by governments. They can also be used by for-profit companies to make money from nonprofits that they form. It is easier for such self-dealing to occur when the entities are not subject to transparency or ethics laws.

Finally, [the report] looks at problems involving public-private partnerships, where millions of tax dollars are spent without transparency or sufficient government oversight.

For additional information on public-private partnerships, Wechsler cites a report on the Baltimore Development Corporation, where the authors concluded that “quasi-public entities modeled on private businesses and insulated from direct political control became the primary entities responsible for urban development.” Moreover, he says, the report found that these entities successfully evaded attempts to increase transparency “by asserting that successful redevelopment required secrecy and autonomy in negotiations with private partners who required quick action and flexibility of their counterparts. This argument has had success not only with legislatures but also with the courts… which have accepted that transparency and accountability must be balanced against the efficiency and effectiveness of these quasi-public development corporations.” Using this balancing test, the courts determined that the Baltimore Redevelopment Corporation was subject to transparency laws, but not to public bidding requirements.

Wechsler concludes by noting that one of the most important areas for transparency is in public budgets, many of which are now posted online. Citing a study by the California Public Interest Research Group, he says that omitting budget information from private contractors “creates a big hole in the public’s knowledge of where their taxes are going.”

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