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New ABO report raises questions about IDA grant practices

October 19, 2011

The Authorities Budget Office released a Special Report on Industrial Development Agency Grant Awards this week. The report reviewed the records of 29 geographically representative IDAs (there are 114 total in New York) and covered the past four years, identifying a total of about $10 million in questionable grants among 19 IDAs. Based on these findings, the report recommends that IDA board members should “undertake a thorough review of their organizations’ enabling legislation, missions, and financial assistance policies to make sure that all activities in which they are engaged are statutorily appropriate and mission-driven.”

IDAs have only limited powers (for general background, see my earlier post on New York’s IDAs), and the report focuses on the ABO’s contention that while the General Municipal Law gives IDAs the authority to grant or loan funds received under federal or state funding programs, for purposes consistent with those programs, “the statute does not specifically confer on IDAs the power to make outright grants, gifts or contributions from their own funds for such purposes….”

One example cited in the report is a $150,000 scholarship fund set up by the Onondaga County IDA. The money had originally been awarded to the Onondaga Community College to help build a technology education center, but it was never used. More than a decade later, the college asked the IDA to let it use the money for other purposes, and the IDA agreed to the scholarship fund. Other examples include a $500,000 matching contribution from the Orange County IDA for renovations and sports facilities at the nonprofit Newburgh Armory Unity Center, $75,000 in funding from the St. Lawrence County IDA to help market the county as “the fishing capital of the world,” and a $10,000 grant from the Clarence IDA to help the local chamber of commerce relocate its offices.

Although there might not always be much practical difference between providing direct grants and offering other types of subsidies (e.g., grants from federal or state funds, help with property acquisition, equipment purchases, tax exemptions, etc.), the ABO emphasizes that IDA financing, whatever its form, must comply with the requirements of the General Municipal Law:

While some may argue that the language in General Municipal Law is open to interpretation and creates a gray area for boards of directors, the ABO believes that the law is clear on one point. The structure of any IDA funding should have as its primary purpose economic growth, the stabilization or expansion of employment, or the attraction of new businesses to the area. These public purposes cannot be secondary benefits. The primary purpose for the use of those funds cannot be for the benefit of the private entity. Nor should the funding be intended to subsidize the operations of the recipient. Moreover, an IDA funding decision should be made with the expectation that the IDA would receive an explicit benefit that advances its mission and purpose, and is not made for marketing or public relations purposes.

This is strong language for IDAs, given that development subsidies have often been equated with economic growth without much in the way of cost-benefit analysis (for some notorious examples of bad IDA behavior, see the 2010 NY Jobs With Justice report, No Return on Our Investment). As the ABO explains, this lax approach to economic development financing is due in part to a sort of mission creep:  “IDAs are charged with promoting economic stability and enhancing the economic welfare of the residents…. Boards of directors view this mission very broadly and, therefore, justify any action or financial decision as supportive of these objectives.” Board members are also more likely to consider the project application fees collected by IDAs as “private” monies that aren’t hemmed in by the same restrictions that apply to IDAs’ other public funding sources.

These assumptions are faulty, however. As the report explains, direct grants don’t meet the standards set out in the General Municipal Law when they’re made for charitable purposes, to provide revenues for project recipients, or to market IDAs among the business community. (Direct grants are presumably inappropriate in other cases too, although IDAs can get around this problem fairly easily by offering different types of assistance that are authorized by the General Municipal Law.) IDA board members, moreover, need to be more aware of these financing limitations, because “even if a recipient is worthy of public support, or the purpose is ancillary to economic development, such routine approval of grants demonstrates that some IDA boards view the role of the IDA as a public funding stream to be used for whatever ends the board can justify.”

The basic statutory requirements that IDAs have to follow when awarding financial assistance are intended to protect the taxpayers and the public fisc, and board members have a fiduciary duty to comply with them. The ABO is right to emphasize these statutory limitations, even if the issue of impermissible direct grants seems rather narrow.

The question of grants and charitable giving at the level of state public authorities was addressed in a 2007 Attorney General opinion relating to certain programs funded by the Long Island Power Authority. As in the ABO’s report, the Attorney General emphasized the statutory constraints that bind LIPA’s activities, explaining that “the legality of a payment…, whether in the form of a sponsorship or a charitable contribution, depends on whether it directly relates to a power, duty, or purpose of LIPA.” While the Attorney General approved of grants made as part of a national solar energy program—because LIPA was statutorily authorized to “implement programs and policies designed to provide for the interconnection of… solar electric generating equipment owned or operated by residential customers”—its charitable giving program, which served community organizations such as the Long Island Junior Soccer League and the New York Horse Rescue Corporation, was found to be unauthorized and inappropriate. As explained in the opinion:

while LIPA has “all the powers necessary or convenient to carry out the purposes and provisions” of the LIPA Act…, we believe that increased [community] goodwill is neither necessary nor convenient for complying with the provisions of or achieving the purposes of the LIPA Act. “Indeed, the beneficial corporate public relations generated by the largesse made in the name of public utilities essentially advances predominately the private interests of the utility corporations…. and are too peripheral to the service interests of the ratepayers.”…. Furthermore, the charitable contribution program appears to conflict with the “sine qua non objective” of the LIPA Act, “to give LIPA the authority to save ratepayers money by controlling and reducing utility costs.”

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