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April 14, 2011

 

DiNapoli: Use of Local Development Corporations Out of Control

Report Finds Officials Using LDCs to Skirt the Law; Comptroller Proposes Reforms

Citing an on-going pattern of abuse, State Comptroller Thomas P. DiNapoli today announced a package of reform proposals that would limit local governments' use of local development corporations (LDCs) and other private entities such as limited liability companies (LLCs). The proposed reforms would also give the State Comptroller direct audit authority over LDCs, LLCs and similar entities controlled by local governments.

"Local governments are supposed to use LDCs for economic development purposes," DiNapoli said. "But we found that isn't always the case. Time after time, our auditors uncovered LDCs being used to skirt the laws governing local government operations. And that's costing taxpayers money.

"LDCs are a good idea that, in too many cases, has been put to bad use. There must be more oversight and more control over LDCs. Taxpayers shouldn't be forced to support another layer of shadow government."

LDCs were originally intended to allow New York's counties, cities, towns, and villages to utilize these entities for economic development purposes and to promote employment opportunities. Because many activities undertaken by LDCs are exempt from taxation, they are used to construct or rehabilitate industrial or manufacturing plants or to encourage such businesses to relocate or remain in a particular region. However, current law includes loopholes that allow LDCs to be used for purposes beyond the original intention.

DiNapoli also released a report detailing his reform agenda for LDCs and information about the operations of LDCs in New York State. The comptroller's office currently does not have the authority to audit the state's 279 LDCs directly. DiNapoli's auditors can only examine the financial relationships of local government that have relationships with LDCs. These audits found repeated instances where a local government's use of an LDC or similar organization has cost taxpayers money because state finance laws were avoided.

DiNapoli cited several instances in which the use of LDCs and LLCs unnecessarily drove up taxpayer costs, including the use of an LLC by the city of Rochester to purchase a ferry that ended up costing taxpayers nearly $20 million.

A 2009 DiNapoli audit found that the Nyack Fire District used two LDCs to circumvent the competitive bidding process and the voter-approved cost to construct a new firehouse. As a result, taxpayers could pay nearly $10 million more than voters authorized, and the firehouse will not be owned by the fire district.

DiNapoli's reform proposals include:

  • Expanding the comptroller's audit authority to cover LDCs, LLCs and other comparable entities under the control of one or more local governments;
  • Preventing LDCs, LLCs and other not-for-profit corporations from financing a local government's operations or capital assets;
  • Prohibiting the creation of LDCs solely for the generic purpose of "lessening the burdens of government and acting in the public interest," which many local governments utilize to finance projects or activities not related to economic development;
  • Requiring any contract between a local government and an LDC to be for fair value, and limiting those contracts to a term not to exceed five years (subject to renewal);
  • Prohibiting any additional compensation for board members, officials, and employees of certain LDCs in instances where they serve or have recently served as officers or employees of a municipality;
  • Requiring that the public notice of any proposed transfer of municipally-owned real property to an LDC include information such as the price or benefit to the local government; and
  • Clarifying that no local government or school district may guarantee or assume the debt of any not-for-profit corporation or LLC formed by, on behalf of, for the benefit of, or under the control of the local government or school district.

A copy of the report, "Municipal Use of Local Development Corporations and Other Private Entities" can be seen at: http://www.osc.state.ny.us/localgov/pubs/research/ldcreport.pdf



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