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Public authorities and the fourth sector

October 14, 2011

Broadly speaking, you can classify corporate organizations into three types: business, government, and nonprofit—or private, public, and social, stated slightly differently. But, as reported this week in the New York Times, there’s a growing trend among the states to recognize new types of corporations that put social goals ahead of maximizing profits. While they go by different names, these benefit corporations have generally been labeled as part of the fourth sector, which has emerged as an alternative framework to the traditional private, nonprofit, and government sectors.

Public authorities differ from these new hybrid corporations in a few ways. Aside from skewing more toward the government sector than the private or nonprofit sectors, they’ve been around a lot longer, and they weren’t designed with socially responsible ideals or complex twenty-first century problems in mind. Rather, they were created (and pioneered, famously, by New York’s master builder Robert Moses) as a way to get around nineteenth century restrictions on state debt in order to finance big public works projects like bridges and tunnels, and later, economic development projects. And while early public authorities may have created their own sort of fourth sector, they’ve struggled over the years to define their fiduciaries (e.g., the state, the public, that portion of the public being served by the authority, the board of directors, or some other combination of interests). They’ve also seen major shortcomings in areas like transparency and accountability, leading to various reforms based on concepts like government ethics and corporate fiduciary duties.

Nevertheless, public authorities share a lot of similarities with the new types of hybrid companies that make up the fourth sector. Like these entities, public authorities don’t fit neatly into any of the traditional organizational sectors. They also offer alternative corporate structures that place public functions before profit. Reports on the fourth sector, however, usually leave out public authorities, instead focusing on socially responsible businesses and low-profit corporations. This is unfortunate, because the fourth sector could learn quite a bit from public authorities.

The philosophy behind the fourth sector is set out in a recent report from the Fourth Sector Network, aptly titled The Emerging Fourth Sector, which emphasizes how the distinctions between the public, private, and nonprofit sectors have blurred over the past few decades.

The report also identifies nine core attributes of the ideal fourth sector “For-Benefit” corporation:

  • Social Purpose. The For-Benefit organization has a core commitment to social purpose embedded in its organizational structure.
  • Business Method. The For-Benefit organization can conduct any lawful business activity that is consistent with its social purpose and stakeholder responsibilities.
  • Inclusive Ownership. The For-Benefit organization equitably distributes ownership rights among its stakeholders in accordance with their contributions.
  • Stakeholder Governance. The For-Benefit organization shares information and control among stakeholder constituencies as they develop.
  • Fair Compensation. The For-Benefit organization fairly compensates employees and other stakeholders in proportion to their contributions.
  • Reasonable Returns. The For-Benefit organization rewards investors subject to reasonable limitations that protect the ability of the organization to achieve its mission.
  • Social and Environmental Responsibility. The For-Benefit organization is committed to continuously improving its social and environmental performance throughout its stakeholder network.
  • Transparency. The For-Benefit organization is committed to full and accurate assessment and reporting of its social, environmental, and financial performance and impact.
  • Protected Assets. The For-Benefit organization can merge with and acquire any organization as long as the resulting entity is also a social purpose entity. In the event of dissolution, the assets remain dedicated to social purposes and may not be used for the private gain of any individual beyond reasonable limits on compensation.

Public authorities already embody some of the fourth sector principles listed above, but others don’t quite fit, or offer only fuzzy solutions—the goals of “inclusive ownership” and “stakeholder governance,” for instance, don’t really explain how stakeholders (i.e., fiduciaries) should be identified or how their contributions should be weighed. And transparency could be a lot harder to obtain among private fourth sector entities than it is among public authorities, which are at least subject to some government oversight.

Proponents of the fourth sector recognize these problems. As the report notes, it’s an “ambitious scenario” and “changes like these do not happen overnight. The transition of Fourth Sector activity toward the archetype will be an evolutionary process.” It will also require a new sort of organizational ecosystem, with complex “cross-sectoral collaboration.”

But while the fourth sector framework presents a new way to understand the need for organizational evolution in light of our current environmental, social, and economic problems, it’s not really clear how it should work or whether it’s viable. It’s also unclear whether we need new forms of hybrid corporations at all. As the New York Times article explains, critics of these new corporate formats have questioned their necessity, suggesting that existing corporate and nonprofit laws are flexible enough to accommodate fourth sector goals. The same might be said for public authorities, which provide state and local governments with a broad range of options for structuring public-private entities.

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7 Comments leave one →
  1. Bill Licata permalink
    October 17, 2011 10:00 am

    Help. If public authorities are apart of an emerging ‘fourth sector’ of government what is the check on them? Has a public authority in New York ever gone bankrupt without the state government coming in to assume the obligations or bonds? Has a public authority in New York ever had its charter revoked by the Legislature, can anyone else (i.e. the Governor) revoke a charter?
    In one of Mr. Fein’s articles, “Would a State Constitutional Amendment Promote Public Authority Fiscal Reform?,” he writes ‘The courts confronting fiscal reality strain to find legality,” isn’t this ultimately putting the decision to raise money through debt issues in the hands of banks with their credit rating decisions and not the people with their votes? I am naieve enough to think we live in a democracy.
    Could someone point me in the right to direction to get answers for these questions.

  2. Bill Licata permalink
    October 17, 2011 2:21 pm

    Amy,
    Thank you for the post, my apologies for my ignorance, the more I read the more questions I have. Am I confusing the fourth sector with what JONATHAN ROSENBLOOM in Can A Private Corporate Analysis of Public Authority Administration Lead to Democracy?, states about public authorities, “[t]he widespread use of public authorities has led critics to refer to them as the ‘fourth branch of government,’ ’phantom governments’ and ‘underground government[s].’”

    I have not read all the articles you have sent me yet, but I do have more questions: 1) If a public authority’s projects are ‘profitable’ or ‘in the black’, where does the surplus income or revenue go?; 2) Isn’t there an incentive for the boards and workers to extend the duration of the bonds, by refinancing, thus lowering the interest expense and increasing ‘profit’ or surplus revenues?; 3) If there is surplus revenue isn’t there an incentive for the board and management to handsomely compensate themselves or lobbyists or consultants or contractors, who are friends? Is ther a check on this type of activity?; 4) I assume ‘profits’ or ‘surplus revenues’ are siphoned off by the Legislature, which it then distributes the money via grants to Assembly-member and Senator projects in the state – how can this be done when the state is operating under a deficit? Further, I read an article in the Putnam Courier about Dormitory Authority of the State of New York grants being used to build a covered bridge over a tiny creek to an abandoned field, literally a bridge to nowhere – can this be stopped? and 5) Board members of public authorities come from the private sector (presumably banks, investment firms and investment banks) with connections and experience in the financial sector. What is to stop the board from rewarding bond issues to ‘friends’ and associates, who will turn a blind eye to a project’s projected cash flow and finances or not rigorously audit and test the numbers, so that the bank or investment bank may generate ‘fee revenue’- if the finacial statements are hidden this would seem to incentivise conflicts of interest?

    I hope I am not asking too many questions. Your help in pointing me in the right direction is greatly appreciated.
    Sincerely,
    Bill

  3. Bill Licata permalink
    October 18, 2011 1:23 pm

    Amy,
    This is a wonderful website. I did read the report, GOVERNOR’S TASK FORCE ON THE IMPLEMENTATION OF THE 2009 PUBLIC AUTHORITIES REFORM ACT, thank you so much for the reference. As you may have guessed, I have more questions and clearly some answers to previous ones.
    It seems like the business judgment rule from State Business Corporations Law, duty of care and duty of loyalty are being imposed on public authorities through PARA 2009? Accordingly, board members are expected to operate as fiduciaries and are responsible for carrying out their duties with a reasonable degree of diligence, care, skill, and independence. Breach of this duty activates the power to remove a director under PAL 2827(?). The power to remove resides in the appointing and designating agencies not the Authorities Budget Office (Public Authorities Oversight Agency), in the event a recommendation is not taken the appointing authority or ABO can contact NYSAG’s Office or the local DA’s Office – is this accurate?
    According to the NYS Comptroller’s Office there are 1098 public authorities in New York State (http://www.osc.state.ny.us/pubauth/byclass.htm), it appears the ABO is in a vast financial jungle, but unfortunately it is a tiger with neither claws nor teeth or to borrow a more agrarian metaphor, as Churchill said, it seems to be a “sheep in sheep’s clothing.” How can the ABO, an oversight agency, with a staff of 11 and a budget of $1.3 million (?) effectively and efficiently conduct its compliance and oversight mission over 1098 public authorities with bond issues of $130 billion, authorities whose finances have been characterized as schemes and aren’t for the most part ‘transparent’ or at least are operating in shadow?
    DASNY was given the mission to issue bonds to build dormitories – now they are making grants for economic development, is this outside the scope of the enabling statute AND prospectively creating ‘mission creep,’ or operations outside the mission statement they are supposed to file (according to PARA 2009?) with the ABO(?). Is there a conflict of interest built into public authorities regarding dissolution or charter revocation? It is in the personal interests of employees and board members of authorities to remain employed. Is the best interests of the public authority to operate as a going concern getting conflated with personnel interests to remain employed? In other words, for example, hypothetically the demand for dormitories has been met and all the bonds have been paid off with the underlying assets reverting back to the state – what would be the need for DASNY – but the employees and board members of DASNY would want to continue to have their jobs instead of dissolving the corporation or revoking the charter, so they find new ways to loan money on unrelated projects or projects outside their powers enumerated in their enabling statute?
    I hope I’m not being too much of a nuisance, once again your references would be greatly appreciated. I will keep reading.
    Bill

    • October 18, 2011 3:43 pm

      Bill,

      You’ve raised a lot of good points here. Regarding fiduciary duties, I suggest you take a look at this article: https://publicauthorities.wordpress.com/2011/08/05/froelich-on-the-dual-nature-of-fiduciary-duties-for-public-authorities/

      You can get more up to date information about the number of public authorities at the ABO’s website, as well as other information about the office and public authorities laws & regs. The website is: http://www.abo.state.ny.us/

      I’ll try to get back to you with answers for some of your more specific questions. As I said earlier, you’ve hit on a lot of really interesting and important topics that we hope to cover here in more detail.

      You can also check out the Public Authorities Information Clearinghouse for resources on public authorities in New York and elsewhere. We also have videos up there of several public authorities conferences that we’ve had at Albany Law School over the last few years. Lots of good stuff. The website is: http://www.publicauthority.org/

      Best,
      Amy

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