This monograph by Adam Simms, subtitled "Public Authorities are Out of Control and Threatening the State's Fiscal Health," was published in November 2008 by Wagner College's Hugh L. Carey Institute for Government Reform, where Simms is a senior research fellow.

1. New York’s “Secret Government”
Public Authorities Are Out of Control
and Threatening the State’s Fiscal Health
Adam Simms
Senior Research Fellow,
Hugh L. Carey Center for Government Reform
November 2008
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Published by the
Hugh L. Carey Center for Government Reform
at Wagner College
Staten Island, New York

2. The Hugh L. Carey
Center for Government Reform
at Wagner College
Dr. Seymour P. Lachman
Director
The Hugh L. Carey Center for
Government Reform at Wagner
College conducts non-partisan
studies of state government and
proposes ways to improve legislative
and administrative effectiveness.
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Wagner College
One Campus Road
Staten Island, New York 10301
Tel: 718-420-4131
seymour.lachman@wagner.edu
www.wagner.edu

3. New York’s “Secret Government”
Public Authorities Are Out of Control
and Threatening the State’s Fiscal Health
Introduction
Public authorities play an inordinate role in the lives of New Yorkers. They are quasi- New York
governmental institutions, chartered by the state legislature for the purpose of financing State relies
and administering essential services upon which New Yorkers have come to rely for so heavily, so
transportation, construction of hospitals and university campuses, low- and moderate-
completely
income housing, urban redevelopment, environmental protection, electricity, solid waste
on public
management, municipal parking garages, water treatment and distribution, and industrial
authorities
development. There are so many public authorities in New York State that at the beginning
of this century, state officials had lost count of their number. When tallies were undertaken
to provide
between 2003 and 2006, estimates fluctuated from a high of 733 to a low of 292. the services
New York State relies so heavily, so completely on public authorities to provide the that citizens
services that citizens of a modern industrialized society expect from their government that of a modern
public authorities have been called “New York’s secret government.” Though New Yorkers industrialized
are generally aware that these authorities exist, the label of “secret government” is warranted society expect
by the fact that a hallmark of American governance since the nation’s founding has been from their
the principle of “no taxation without representation”; in other words, that taxes may only be government
levied with the consent of the people who pay them. But, starting in the 1960s, New York that public
State’s elected officials seized upon the idea of using public authorities to raise money by authorities
selling bonds in order to finance a wide variety of projects and services. The attraction of have been
this mechanism was that since the authorities are run by people who are appointed — not called “New
elected — to their posts, voters who are displeased with the debts undertaken by public
York’s secret
authorities cannot hold elected officials responsible by, say, voting them out of office.
government.”
By late 2005, New York State’s debt amounted to $48.2 billion, which made the state’s
debt burden the second highest among the nation’s ten largest states. All residents of New
York — man, woman and child — carry a debt $2,509, over and above whatever mortgage,
car or student loan and credit card balance they may owe. New York’s public authorities
accounted for 92 percent of both figures, and yet the state’s voters had never been asked
whether they wanted to go into debt to fund the authorities’ projects.
Another reason New York’s public authorities have been called the state’s “secret
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4. New York State’s “Secret Government”
government” is that they have become financial mechanisms for the state, and the
complexity of state finance is not a topic with which most New Yorkers are familiar, and
is rarely one in which most have a day-to-day interest. When the news media report about
public authorities, those reports are generally about an authority in the context of a scandal
This or controversy regarding one of its actions. Systematic reporting, much less systematic
monograph is analysis, of the state’s network of authorities has been virtually non-existent. On the other
an attempt to hand, what systematic analysis exists and is readily available interested citizens is extensive
describe for — enough at least to fill the three three-inch three-ring binders used in preparing this
monograph. But these analyses, which take the form of state government reports and policy
an average,
papers by civic organizations, tend to be — to state it bluntly — dry reading, at best.
concerned
This monograph is an attempt to describe for an average, concerned citizen and
citizen and reader the challenges public authorities pose to open, sound and responsible government in
reader the New York State. It seeks to bridge the gap between engaging but episodic news reportage
challenges and sound but often mind-numbing reports and studies with a narrative examination of a
public five-year effort to pass legislation to strengthen oversight of the state’s public authorities.
authorities Parts I and II —E-Z Pass: “Kalikow & MTA cronies get passes for life — and YOU pay”
pose to open, and The MTA’s “Two Sets of Books” — focus on controversies surrounding the Metropolitan
sound and Transportation Authority (MTA), the state’s second-largest public authority and arguably
responsible the one that has the greatest daily impact on the greatest number of the state’s residents. The
government essential issues examined are the MTA board members’ understanding of their obligations
in New York as leaders of a public benefit corporation, and the extent to which public authorities are
State. insulated from legal and political intervention in their decisions and actions.
Part III, From “Full Faith and Credit” to “Moral Obligation”: How New York’s Public
Authorities Just Grew and Grew” examines the growth and development, from the 1960s
onward, of public authorities as a mechanism by which elected officials discovered they
could increase the state’s borrowing without asking voters for approval.
Part IV, “New York’s Secret Government” describes former State Comptroller Alan
Hevesi’s role during 2003 in framing the issue of public authority debt as one requiring
broad legislative reform.
Part V, Thrust and Parry: Setting the Parameters of Public Authority Reform, sets
forth the polite but pointed political skirmishing during 2003-2006 between New York’s
Republican Governor George E. Pataki and the state’s Democratic leadership over whether
public authority reform would best be achieved through greater self-regulation or increased
state regulation.
Part VI, Beyond Cosmetic Reform, presents the author’s consideration of suggestions
to complete what has been, at best, an incomplete effort to reform New York’s public
authorities.
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5. The Hugh L. Carey Center for Government Reform • Wagner College
I.
E-Z Pass: “Kalikow & MTA cronies get passes for life — and YOU pay”
A s New York State’s Metropolitan Transportation Authority began laying
groundwork late in the spring of 2008 to ready downstate residents for a round of fare and Donohue’s
toll hikes only four months after a crazy quilt of increases had gone into effect, New York research hit
Daily News staff writer Pete Donohue burrowed through data obtained via a freedom-of- pay dirt: 22
information request to find out how many E-ZPasses had been issued gratis to current and current and 37
former board members of the public authority that operates and maintains bus, subway,
former MTA
commuter rail and bridge-and-tunnel transit for an estimated eight million people each
board members
working day.
What Donohue discovered was red meat for the Daily News, a tabloid newspaper
had special
known for its blue collar and middle-class white-collar populist stances on waste of
E-ZPasses —
taxpayers’ money. Donohue’s research hit pay dirt: 22 current and 37 former MTA board in some cases,
members had special E-ZPasses — in some cases, multiple passes —allowing them free multiple passes
passage through toll lanes on the region’s highways, bridges and tunnels. —allowing
The passes — actually, electronic boxes affixed to an automobile’s front windshield them free
below the rearview mirror — are ordinarily issued by the MTA upon request to drivers passage
who prepay a user-defined amount of money by credit card or check, which the authority through toll
enters in a central computer database. Each time a motorist drives a vehicle outfitted with lanes on
the electronic box through a specially designated toll booth, a device electronically reads a the region’s
number issued to the pass and automatically deducts from the user’s account the amount highways,
designated for that toll crossing. The E-ZPass system is quick and is credited with speeding bridges and
up traffic through the toll sites. Drivers who use it no longer need to sit in line to make a tunnels.
cash transaction with a human toll collector. Nor do E-ZPass holders have to worry about
whether they have cash on hand to navigate through the varying tolls charged at different
crossings in the metropolitan region’s dense web of highways, bridges and tunnels.
An E-ZPass offers a convenient and arguably quick way for commuters to get to work
and for truckers to deliver goods. But it is not cheap. For example, the round-trip passenger
car toll over the Verrazano-Narrows Bridge, which connects Brooklyn with Staten Island,
where Wagner College has its campus, is (at the time this monograph was written) $8.30
for drivers equipped with an E-ZPass, and $10 for drivers without one. (Residents of
Staten Island, who have a special dispensation, pay a reduced rate of $4.98.) Thus, a weekly
commute to Staten Island over the Verrazano-Narrows Bridge from Brooklyn, Queens or
further east on Long Island costs drivers with an E-ZPass $41.50. A commuter who has to
cross additional toll points to get to the toll-free Belt Parkway, which leads to the bridge,
pays additional charges that are deducted from the pass. And none of these amounts
include the cost of fuel and insurance necessary to get the vehicle from its driveway to the
bridge’s toll plaza.
In all, Daily News reporter Donohue discovered that 57 current and former MTA
board members were issued a total of 95 no-charge, sail-through-the-tollbooth passes. To
illustrate possible reasons for issuing more than one pass per board member, Donohue
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6. New York State’s “Secret Government”
looked up Peter S. Kalikow’s E-ZPass holdings. Kalikow, a New York City real estate
developer, one-time owner of the New York Post, the Daily News’ tabloid arch rival, and
immediate past chairman of the MTA board, offered a particularly easy target for populist
tub-thumping. While chairman five years earlier, in 2003, Kalikow had presided over the
largest single fare increase in recent memory, which generated not only groans from the
“And, get commuting public, but allegations that the increases were unnecessary. The maladroit
this, nobody way in which the authority handled its press and public relations on that occasion had
thinks there’s made Kalikow heir to Erich von Stroheim’s Hollywood nickname, “The Man You Love to
Hate.”
anything
“The multimillionaire developer,” Donohue explained, “gets the multiple electronic
wrong with it.”
tags so he doesn’t have to switch them from car to car in his private fleet” of an estimated
45 or 48 cars, “many vintage or custom-made, and each worth a small fortune.” The Daily
News article was accompanied with photographs of the former chairman and a head-on
shot of one of those vehicles, described as a “Ferrari 612 Scaglietti, specially built for the
superwealthy Peter Kalikow…” In high dudgeon, Donohue wrote, “And, get this, nobody
thinks there’s anything wrong with it” (referring to the free passes, not Kalikow’s Ferrari).
Asked to comment, Kalikow observed, “Everybody on the board serves for nothing …
They do a lot of hard work and it’s a way of saying thank you.” MTA spokesman Jeffrey
Soffin seconded Kalikow: “Our board members are not compensated and this is one very
small way to acknowledge their many hours of public service.” 1
But with talk of another round of fare and toll hikes to make up for declining revenue
from fees levied on real estate transactions in order to subsidize the authority’s $9 billion
annual operating budget, rising fuel costs for operating its fleets of buses and commuter
railroads, and sharply increased deficits in the next several years to pay debt service on its
bonds, the Daily News’ story posed what had become a familiar question about the MTA:
Its board members, who serve without direct monetary compensation, might be performing
their duties as a “public service,” but were they truly serving the public in accepting this
perk?
New York State Attorney General Andrew Cuomo’s office that same day answered
with a resoundingly “no.” In all probability alerted to the story the Daily News was set to
run, Benjamin M. Lewsky, deputy counsel in the attorney general’s department of law, sent
James B. Henley, the MTA’s deputy executive director and general counsel, a stinging letter
headed “Illegal Compensation of Board Members.”
1 Pete Donohue, “Kalikow & MTA cronies get passes for life — and YOU pay,” New
York Daily News, May 27, 2008 [http://www.nydailynews.com/ny_local/2008/05/27/2008-05-27_
kalikow__mta_cronies_get_passes_for_life.html]. Donohue’s “scoop” was actually nothing new
regarding free passes for former MTA board members. An MTA statement, issued on December
6, 2004 in then-Chairman Kalikow’s name, said plainly: “The issuing of transportation passes to
former board members is a long standing policy of the Metropolitan Transportation Authority in
appreciation for the hard work, dedication, and the countless hours with no compensation these
members gave to the betterment of New York’s transportation system.” [http://www.mta.info/
mta/news/releases/?agency=hq&eng=041206]. The statement was available on the MTA’s Web site
as of late summer 2008.
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7. The Hugh L. Carey Center for Government Reform • Wagner College
By this letter, the Office of the Attorney General of the State of New York asks
that you immediately terminate and rescind all free E-ZPass tags that have been provided
to past and present MTA board members … [P]roviding these tags to board members is
a form of compensation that violates a previously-issued formal opinion of the Attorney
General and the MTA’s own enabling legislation …
A footnote in the letter noted that “compensation” was defined as including “the total The public
consideration paid to an officer or employee for his or her service, including salary or wages authority,
and authorized fringe benefits.” Unstated was the fact that the federal Internal Revenue however,
Service includes fringe benefits in its calculations of taxable personal income.2 seemed
Exactly how much was this fringe benefit — one which Kalikow’s successor as MTA
unwilling to
chairman, H. Dale Hemmerdinger, acknowledged had been in place for decades, and
surrender
unchallenged by previous state attorneys general — worth? Playing catch-up with its tabloid
competitor, three weeks later New York Times reporter William Neuman noted that in the
its perks
twelve months between November 1, 2006, and November 1, 2007, 45 current and former
merely on the
board members had used their free E-ZPasses 7,513 times. Since the one-way toll on most directive of the
of the MTA’s bridges and tunnels was $4 during that period, Neuman calculated that the state’s chief
authority had given a free pass to $30,052 in toll collections. 3 legal officer.
Thirty thousand dollars was a proverbial drop in the bucket compared to the
MTA’s projected $500 million ocean of red ink in 2008 and $700 million in 2009. Had it
collected its board members’ forgiven tolls, the authority’s projected deficit crisis, which
generated talk of imminent fare and toll increases, would not have been noticeably affected.
But $30,000 would have paid for the annual toll charges of fourteen hypothetical Staten
Island-bound commuters crossing the Verrazano-Narrows Bridge, and that implication
apparently informed the attention the Daily News and The New York Times devoted to
revelation of the MTA’s free passes.
The public authority, however, seemed unwilling to surrender its perks merely on
the directive of the state’s chief legal officer. “Given the newly stated view of the attorney
general, which is contrary to the M.T.A. position,” board chairman Hemmerdinger told
The New York Times, “we are going to seek a declaratory judgment and allow a court to
determine whether or not this constitutes compensation.” A day later, though, after behind-
the-scenes discussions with representatives of the attorney general’s and Governor David
Paterson’s offices, Hemmerdinger reversed course. Cuomo, in lower Manhattan that day,
reportedly “applauded” the decision. But other comments, recorded in a news conference
2 “Attorney General Cuomo’s Letter to the Metropolitan Transportation Authority,” press
release, Office of the Attorney General, May 27, 2008 [http://www.oag.state.ny.us/press/2008/
may/may27b_08.html]. Pete Donohue, “Get ‘em off E-Z Street now, Andy warns MTA,” New
York Daily News, May 28, 2008 [http://www.nydailynews.com/news/2008/06/02/2008-06-02_no_
tolls_paid_on_24000_ezpasses.html]
3 William Neuman, “In Dispute on Free Transit Passes, It’s New York Agency vs. State’s
Top Lawyer,” New York Times, May 29, 2008; William Neuman, “Putting a Price on Free Passes
for M.T.A. Board Members,” New York Times, June 21, 2008. [All articles from The New York Times
may be accessed on its Web site by using the author’s name and the article’s headline and date as
criteria in the site’s advanced search feature.]
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8. New York State’s “Secret Government”
in front of his office, were stern: “You want people on the [MTA] board representing only
the people of the state and not their own interests.” 4
By mid-June, when the MTA let it be known that it was considering another fare and
toll increase, the E-ZPass flap appeared to be over. 5 But not quite yet. Hemmerdinger’s
decision to revoke former board members’ passes, and to instruct current board members
“Why should that their E-ZPasses, as well as free passes for use on subways, buses and railroads, could
I ride [the be used only while on authority business, had to be ratified at the board’s next meeting,
railroad] and scheduled for June 25. However, on June 18, a week before that session and on the same
inconvenience day as the MTA announced that “a burgeoning financial crisis” was forcing the authority
to scale back most of the expanded subway and bus services it had promised the previous
myself when
December, when it had imposed a round of fare and toll hikes, a prominent MTA board
I can ride
member revived the E-ZPass ruckus. 6
in a car?” During an intermission between meetings of the authority’s bridges and tunnels
committee and its Long Island Railroad and Long Island Bus committee, David S. Mack,
the MTA’s first vice chairman and holder of six free E-ZPasses, told reporters that, as a
Long Island resident, he rode the Long Island Railroad five to ten times a year. He then
went on to intimate that without his free, authority-issued railway pass, he might not ride
as frequently — or at all. “Why should I ride [the railroad] and inconvenience myself
when I can ride in a car?” Mack reportedly said. MTA board members, he asserted, were
“invaluable” to maintaining the authority’s level of service on behalf of the public served.
“If you [the public] saw something and called it in,” Mack said, according to Times reporter
William Neuman, “it goes right here,” placing his foot atop a wastepaper basket. “When the
normal public calls it in, you know what happens with the bureaucracy, they don’t get the
response that a board member would get.” The MTA vice chairman also wondered aloud
whether, deprived of free E-ZPasses, board members would opt for the city’s free bridges
linking Manhattan and the outer boroughs, rather than using the authority’s toll bridges
and tunnels. Mack noted (and Neuman reported) “that he kept the telephone numbers of
4 William Neuman, “In Dispute on Free Transit Passes …,” ibid.; William Neuman, “M.T.A.
Does About-Face on Free E-ZPass Travel,” New York Times, May 30, 2008. Three days later, the
Daily News reported that the MTA had also issued 24,000 non-revenue producing E-ZPasses to
various government agencies throughout the state, including the New York State Police, New York
City’s police and fire departments; the city’s five borough presidents, and the Port Washington
(Long Island) Police Department. In addition, more than a thousand retired MTA bridge and
tunnel employees possessed free passes. Attorney General Cuomo’s office had 257 passes, which an
unnamed spokesman indicated were “used by investigators on official duty, mostly upstate where
there are no MTA facilities. The official said it makes little sense for a public authority funded by
the state and city to bill state and city agencies, as it’s the same pot of money.” Pete Donohue, “No
tolls paid on 24,000 E-ZPasses,” New York Daily News, June 2, 2008 [http://www.nydailynews.
com/news/2008/06/02/2008-06-02_no_tolls_paid_on_24000_ezpasses.html].
5 William Neuman and Jeremy W. Peters, “As Revenue Falls, M.T.A. May Raise Fares
Again in ’09,” New York Times, June 12, 2008.
6 William Neuman, “Subway Service Increase to Be Less Than Hoped,” New York Times,
June 19, 2008.
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9. The Hugh L. Carey Center for Government Reform • Wagner College
the managers of the authority’s bridges and tunnels in his car and that if he saw a problem,
he called them in from the road. He said he had instructed bridge managers to open an
additional toll lane if there were long lines.” 7
Buried toward the end of the Times’ article was notice that Mack, described as
“a wealthy real estate executive” who also served on the board of the Port Authority of
New York and New Jersey, said that he was now paying for the type of E-ZPass used by “To say you’d
the public. But two other MTA board members, Mitchell H. Paley, of Suffolk County, only use the
Long Island, and Francis H. Powers, of Staten Island, were reported to be less resigned to facilities if
surrendering their perk. This raised the prospect that a revolt was brewing against MTA they’re free is
chairman Hemmerdinger’s decision to abide by the state attorney general’s opinion and
outrageous.
to restrict board members’ use of their heretofore free, authority-issued passes. Benjamin
You’re there to
Lawsky, who had issued the attorney general’s opinion on May 27, stoked the rumor as he
hardened his office’s stance. “If the board rejects its own leadership,” Lawsky said, “we are
represent the
prepared to enforce our position because no one is above the law.” 8
users of the
At that point, Governor David Paterson stepped in, and Attorney General Andrew system. You’re
Cuomo raised the stakes yet again. Paterson, citing the state’s threatened economy, declared not there for
that a decision by the MTA board to overturn its chairman’s decision “would demonstrate the perks,
an utter contempt for average New Yorkers.” Cuomo threatened legal action to recoup you’re not
funds the MTA had not collected from the E-ZPasses it had issued to current and past there for the
board members. He added, in comments to the press delivered outdoors on the steps of his free E-ZPass.”
Manhattan office, “To say you’d only use the facilities if they’re free is outrageous. You’re
there to represent the users of the system. You’re not there for the perks, you’re not there
for the free E-ZPass.” 9
If a revolt had been brewing, it quickly collapsed. Mack issued a written statement
regretting his comments of the previous day and saying he would support restrictions
on transportation passes issued to MTA board members. When the board met for its
regularly scheduled monthly session on June 25, it voted 12–0 to support Hemmerdinger’s
May 29 decision, although without acknowledging that its decades-long generosity might
have been legally questionable. 10
7 William Neuman, “Move to Restrict Free Travel Passes Creates Rare Controversy for
M.T.A. Board,” New York Times, June 19, 2008. Mack’s comment about “inconvenience” was first
reported by the Daily News; see Pete Donohue, “MTA honcho: Why ride if it’s not free?” June 18,
2008 [http://www.nydailynews.com/ny_local/2008/06/18/2008-06-18_mta_honcho_why_ride_
if_its_not_free.html].
8 William Neuman, “Move to Restrict Free Travel Passes Creates Rare Controversy for
M.T.A. Board,” New York Times, June 19, 2008.
9 William Neuman, “Backing Off Free Passes at M.T.A.,” New York Times, June 20, 2008.
10 Pete Donohue, “MTA big really meant he’d rather pay than ride free!” Daily News, June
20, 2008 [http://www.nydailynews.com/ny_local/2008/06/20/2008-06-20_mta_big_really_meant_
hed_rather_pay_than.html]; William Neuman, “M.T.A. Cuts Free Use of Passes by Its Board,” New
York Times, June 26, 2008.
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10. New York State’s “Secret Government”
II.
The MTA’s “Two Sets of Books”
B ashing the MTA is a downstate New York sport. Metropolitan area newspapers report
The MTA on its doings with a gusto ordinarily reserved for tight baseball pennant races. That Peter
wanted fare Kalikow, a former chairman, was the focus of the Daily News’ first report about the MTA’s
and toll policy of issuing free E-ZPasses to past and current board members was no accident. A
increases perfect storm of events five years earlier, in 2003, when Kalikow served as chairman of the
MTA board, had established a baseline of skepticism toward MTA announcements that it
because its
needed further increases.
operating
During December 2002 and January 2003, the MTA posted notices in city subway
revenues were stations throughout New York City, informing riders that the MTA would hold 10 public
being bled by hearings in February to consider fare and toll increases. The increases were necessary, the
the demands of notices said, to close a $2.8 billion budget deficit projected for its 2003 and 2004 fiscal years.
debt service. The authority had not raised fares or tolls since 1995; it was now proposing to raise bus
and subway fares 33 percent, to $2 from $1.50, and bridge and tunnel tolls by 25 percent. It
had avoided doing so by borrowing $10 billion on the bond market seven years ago to pay
for repairing and upgrading equipment and for capital projects. Over the course of the
past seven years, that $10 billion in debt had ballooned to nearly $16 billion, and the MTA
estimated it would increase to $25 billion in a few more years. In the meantime, city and
state aid for capital projects had dried up. As a result, the MTA now faced what financial
analysts termed a structural problem: the cost of paying the interest on its accumulated
debt was mounting at an alarming rate, and the authority had resorted to paying debt
service charges from its operating budget revenues, such as surplus funds from bridge and
tunnel tolls that had customarily been used for subsidizing bus and subway operations in
order to keep those fares low. In sum, the MTA wanted fare and toll increases because its
operating revenues were being bled by the demands of debt service. Reporting this scenario
for The New York Times on January 17, 2003, Randy Kennedy likened it to “a rapidly rising
payment on a credit card balance”: the only way the MTA could keep up with its debt
payments was to increase its income and, absent renewed contributions from the city and
state, that meant it needed to raise fares and tolls. 11
But even as commuters were absorbing the MTA’s announcement that a looming
$2.8 billion deficit presaged fare and toll increases, New York City’s Independent Budget
Office (IBO) was analyzing the numbers provided in the authority’s documents supporting
the proposed increases. True, the IBO’s analysts reported, debt payment projections were
rising; but the situation wasn’t as bad as the MTA said it was. The authority’s budget gap,
the IBO concluded, was actually $951 million over the next two years, one third of the $2.8
billion the MTA had posted on subway pillars throughout the city.
Queried about the apparent discrepancy, the MTA’s budget director, Gary Caplan,
11 Randy Kennedy, “M.T.A. Faces Bigger Woes Linked to Debt, Study Says,” New York
Times, January 17, 2003.
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11. The Hugh L. Carey Center for Government Reform • Wagner College
replied that the $2.8 billion figure was valid, since, The New York Times reported, “[i]t simply
did not take into account a series of cost-saving measures and a corporate restructuring
plan that officials hope will result in significant savings over the next two years.” 12
The same day as The New York Times account appeared, MTA Executive Director
Katherine N. Lapp testified at a New York City Council hearing. She informed legislators
and the press that, indeed, the authority had revised its deficit projection downward for In other words,
the next two years, from $2.8 billion to between $951 million and $1 billion. As her budget it depended
director had foretold, she attributed the new estimate to cost-cutting measures, which, she upon how one
noted, had been published the previous November as part of the MTA’s budget documents. looked at the
Questioned about the disparity in the numbers, she replied, “It’s the difference between
numbers.
looking at the gross gap and the net gap.” 13
In other words, it depended upon how one looked at the numbers. Still, only one
number stuck in the riding public’s mind: $2.8 billion. It was the one the MTA had plastered
on subway platforms, and the one the MTA had continually cited during its public forums
in February.
Overall, the authority’s clientele, whose fares and tolls had last been raised in 1995,
seemed resigned that the increases were a foregone conclusion. So confident was the MTA
board that the increases would be approved that its chairman, Peter S. Kalikow, attended
only two of ten public hearings. 14 Indeed, on the day the board was to meet to vote its
approval of the increases, scheduled to take effect during the first week in May, New York
Times reporter Randy Kennedy noted that the prospect of paying more for the MTA’s
services had “largely failed to generate the widespread opposition that greeted previous
increases.” 15
Yet the difference between the two sets of numbers in “the gross gap and the net gap,”
as Katherine Lapp described to the New York City Council in mid-January, would soon
come back to haunt the MTA. The authority’s complacency and the public’s resignation
to fare hikes were shattered six weeks later when State Comptroller Alan Hevesi released
an audit of the MTA’s financial records, which he had subpoenaed in February. Hevesi’s
analysis showed that during the previous year the authority had had a surplus of $537
million, but had reallocated those funds to pay down debt in 2004, leaving a budget gap
of $236 million for 2003. “If all the funds available to be used in 2003 were included [in the
financial plan the authority released to the public in December 2003],” Hevesi declared
in a statement released to the press, “the MTA would have shown a 2003 surplus of $83
million.” At the same time, New York City Comptroller William C. Thompson Jr. released
an audit of New York City Transit, which concluded that the MTA subsidiary agency
12 Ibid.
13 Randy Kennedy, “M.T.A. Executive Clarifies Budget Deficit,” New York Times, January
18, 2003.
14 Clyde Haberman, “NYC: Rare Sighting: Transit Chief Facing Public,” New York Times,
March 7, 2003.
15 Randy Kennedy, “Transit Increases Overview; Transit Authority Seeks Increase in Fares
and Tolls,” New York Times, March 6, 2003.
9

12. New York State’s “Secret Government”
had on its books an unreported investment pool of $300 million, of which the public had
not been informed during February’s fare-hike forums. Summarizing his findings for the
press and public, Hevesi charged that the MTA had been operating, as New York Times
reporter Kennedy noted, “two sets of books for its financial plans — one set made public
and another for internal use only ….” 16
The new Prominently noted in the fourth paragraph of Kennedy’s report was this caveat: “The
description ... officials involved in the audit acknowledged that even if the [MTA’s] surplus had been
raised the issue used this year, the authority almost certainly would have faced a large gap next year and
of the degree would have needed to raise fares, as expenses rose and revenues remained flat. But they
said that the authority was manipulative and deceitful in the way it arranged its finances
to which ... any
to make the problems look more immediate.” 17 Thus Hevesi acknowledged that the MTA
of the state’s
faced a significant deficit that would justify fare and toll increases in 2004; what his audit
multitude questioned was whether those increases, due to take effect in eleven days, were necessary
of public in 2003.
authorities In other words, it was a judgment call, over which the MTA’s financial planners and
placed the its board differed with the state and city comptrollers. But in the battle for public attention,
interests of the Hevesi emerged with the upper hand after headline and editorial writers transformed
public at the his initial statement about “two sets of financial plans” into “two sets of books.” The new
center of its description blurred distinctions between counting cash on hand and planning for the future;
decisions when suggested financial skullduggery (although both Hevesi and Thompson acknowledged that
exercising its neither the MTA nor the New York City Transit Authority had violated any statutes by
authority to presenting their financial reports as they had), and raised the issue of the degree to which
collect, allocate
and spend the 16 “Hevesi to Issue Subpoena to MTA for Financial Information: Demands Postponement
public’s dollars. of Fare Hike Vote,” press release, Office of the New York State Comptroller, February 19, 2003
[http://www.osc.state.ny.us/ press/ releases/feb03/21903.htm]; Daisy Hernàndez, “Hevesi Orders
M.T.A. Board To Release Finance Data,” New York Times, February 20, 2003; James C. McKinley
Jr., “Political Fight With M.T.A. Won’t End With Vote,” New York Times, March 6, 2003; Randy
Kennedy, “For M.T.A., Bottom Line Is a Matter of Credibility,” New York Times, April 24, 2003;
Tina Kelly, “Comptrollers Urge Changes to Make M.T.A. More Open,” New York Times, April 24,
2003; Randy Kennedy, “Hevesi Says M.T.A. Moved Millions to Simulate a Deficit,” New York Times,
April 23, 2003. In fact, the phrase used in Hevesi’s press release was “two sets of financial plans, one
public and one secret”; see “MTA Hid Half a Billion Dollars in 2002 Budget, Fare Increase Based
on Misleading Information,” press release, Office of the New York State Comptroller, April 23, 2003
[http://www.osc.state.ny.us/press/releases/apr03/042303.htm]. See also: “Hevesi Gives Legislative
Committee Copy of Metropolitan Transportation Authority’s Secret Document[.] Testifies on
Proposed Reforms to the MTA,” press release, Office of the New York State Comptroller, April 29,
2003 [http://www.osc.state.ny.us/press/releases/apr03/042903.htm]; “Testimony by Comptroller
Hevesi to Assembly Corporations Committee on April 29 Regarding Finances of the Metropolitan
Transportation Authority,” Office of the New York State Comptroller, April 29, 2003 [http://www.
osc.state.ny.us/press/releases/apr03/mta42903.pdf]; “Response to the April 29, 2003 Statement by
the MTA,” press release, Office of the New York State Comptroller, April 29, 2003 [http://www.
osc.state.ny.us/press/releases/apr03/042903a.htm].
17 Randy Kennedy, “Hevesi Says M.T.A. Moved Millions to Simulate a Deficit,” New York
Times, April 23, 2003.
10

13. The Hugh L. Carey Center for Government Reform • Wagner College
this public authority — or, indeed, any of the state’s multitude of public authorities —
placed the interests of the public at the center of its decisions when exercising its authority
to collect, allocate and spend the public’s dollars.
Hevesi released his analysis of the MTA’s finances on Wednesday, April 23; the
MTA’s fare increases were scheduled to take effect eleven days later, on Sunday, May 4. On
Thursday, May 1, a day after MTA Chairman Kalikow acknowledged at a breakfast of New The MTA
York City business leaders that the authority “could have done a better job in the area of told the court
transparency, communicating with the public about our finances and the way we go about that “state
our work,” State Supreme Court Justice Louis B. York heard opening arguments in a suit law gave them
brought by the Straphangers Campaign, a transit riders advocacy offshoot of the New York
no obligation
Public Interest Research Group, to stop the rise in subway and bus fares. Gene Russianoff,
to provide a
Straphangers staff attorney and spokesman, told The New York Times that “he believed the
fare increase could be invalidated under New York state law because it was approved only
completely
after legally mandated public hearings in February in which the public relied on misleading
detailed
and deceptive information.” The group’s suit therefore asked that the court find that the accounting to
MTA’s financial plan for 2003 and 2004 had misallocated public funds in order to create the public.”
what had seemed to be a deficit, and that the authority be ordered to hold a new round of
public hearings that presented accurate financial numbers. 18
Defending the MTA’s actions before Justice York, the authority’s attorneys yielded
no ground. Responding to Hevesi’s contentions that the MTA had manipulated its
numbers to create the appearance of an immediate deficit, The New York Times reported
the MTA told the court that “state law gave them no obligation to provide a completely
detailed accounting to the public”; contended that “the public hearings were not meant to
be a ‘working session’ with the public and added that the M.T.A. was not compelled by law
to present ‘a financial plan it was not considering.’ ” 19
Thirteen days later, on May 15, Justice York ruled in favor of the Staphangers
Campaign. York invalidated the fare increases and ordered them rescinded, stating that
the MTA’s hearings in February had been “based on the false and misleading premise that
the M.T.A. was in worse financial condition than it knew itself to be.” Calling the deficit
cited by the authority “a fictitious gap,” he stated that the claim “had a chilling effect on the
public, discouraging an open and complete discussion of the proposals and foreclosing the
presentation of creative alternatives.” As a result, York concluded, these acts “undermined
the public’s confidence in the M.T.A.”
Needless to say, the Straphangers Campaign was pleased. In 1995, the group had
joined with the New York Urban League in an attempt to stop an MTA fare increase,
arguing that the hikes were discriminatory because bus and subway fares had gone up by
a higher percentage than commuter railway fares. That suit was unsuccessful. Eight years
18 Randy, Kennedy, “Attempt to Block Higher Fare Is to Go Before Judge Today,” New York
Times, May 1, 2003; despite its designation, State Supreme Courts in New York are the lowest level
and the entry level of the state’s judicial system.
19 Randy Kennedy, “Saying Public Was Misled, Judge Rescinds Transit Fare Increases,”
New York Times, May 15, 2003.
11

14. New York State’s “Secret Government”
later, the lead plaintiff in the new suit — State Senator David A. Paterson, of Manhattan
— told The New York Times he was “happily surprised” by Justice York’s ruling. 20
York gave the MTA two weeks in which to rescind its bus and subway fare increases.
But the victory ultimately proved illusory. A day later, the authority’s attorneys challenged
the decision in the State Supreme Court’s Appellate Division. That action automatically
The put the two-week deadline on hold, and the fare increases remained in effect as the appeal
Triborough was heard. 21
Authority’s Motorists who used the authority’s bridges and tunnels fared better. Disappointed
lawyers argued that Justice York’s ruling had dealt only with bus and subway fares, the Automobile Club
of New York filed a petition in State Supreme Court for a temporary restraining order
that it was not
to block toll increases, due to go into effect on May 18. During testimony, Gregg M.
legally bound
Mashberg, an attorney for the Triborough Bridge and Tunnel Authority, another of the
to hold public MTA’s subsidiaries, pointed to the cost burden of notifying the public that tolls would not
forums before be raised and then, at some time in the near future, notifying the public that tolls would be
deciding to raised, costs which he estimated would total $3 million. Moreover, he contended, as The
raise its tolls. New York Times reported, the MTA’s bond ratings would suffer “if investors perceived
that its ability to set toll increases was suddenly restricted in some way.” The Triborough
Authority’s lawyers also argued that it was not legally bound to hold public forums before
deciding to raise its tolls. 22
Justice Robert D. Lippmann, who presided over the Automobile Club’s suit, initially
declined to order a temporary halt to the toll increases. But two and a half weeks later,
on June 4, he, too, ordered the MTA to rescind its hikes, and criticized the authority
in harsher language than had his colleague. Citing misleading information provided by
the MTA to the public in order to justify the increases, Lippmann said the authority’s
officials had “displayed a pattern of untrammeled arrogance and deception and disdain
for the public they were obligated to serve.” Moreover, evidence introduced in his court
demonstrated that “during the past few months, and probably years, the M.T.A. has been
operating in a manner inconsistent with the legislative intent” of New York State’s Public
Authorities Law. It was up to the governor, the comptroller and the legislature — not the
courts — to provide “permanent remedies” for such “misconduct”; meanwhile, however, the
court had authority to order the MTA to rescind its toll increases, based on the misleading
information it had used to justify the increases. 23
The New York Times reported that an Automobile Club spokesman was “ecstatic”
when queried about the ruling. But in this instance, too, ecstasy was short-lived. The MTA
filed an appeal, and Justice Lippmann’s order was placed on hold pending review by the
20 Ibid. The Straphangers Campaign suit of 1995 is reviewed briefly in Randy Kennedy,
“Attempt to Block Higher Fare…,” New York Times, May 1, 2003.
21 Randy Kennedy, “Transit Agency to Appeal Judge’s Order to Roll Back Fares,” New York
Times, May 16, 2003.
22 Michael Brick, “Judge Refuses to Stop Increase In Bridge and Tunnel Tolls,” New York
Times, May 17, 2003.
23 Randy Kennedy, “Judge Orders Toll Rollback At Crossings,” New York Times, June 5,
2003.
12

15. The Hugh L. Carey Center for Government Reform • Wagner College
State Supreme Court’s Appellate Division. When the appellate division handed down its
judgment on July 15, the MTA carried the day. The five-member judicial panel unanimously
declared that the authority’s forecast of a $2.8 billion deficit had been a “salient, undisputed
fact” at the start of the previous February’s public hearings, and were, therefore, not
“fictitious,” as two State Supreme Court justices had mistakenly ruled. Moreover, the
appeals panel observed, the MTA had complied with the state’s Public Authorities Law Any remedy
when the authority posted its public hearing notices: the notices had been printed using requiring the
large, clear type, and the changes proposed were broadly described. The panel went on to M.T.A. to
declare: “While it would be desirable from the public’s perspective to have the M.T.A.’s make greater
budgeting process be completely transparent and open for detailed inspection and, perhaps,
disclosure of
robust debate, such requirements would impose additional administrative burdens and
its finances at
costs.” In sum, the authority had complied with the letter of the law; any remedy requiring
the M.T.A. to make greater disclosure of its finances at future public hearings “is a political
future public
decision for the Legislature to determine,” the panel stated. 24
hearings “is
Ten weeks later, on September 23, New York State’s Court of Appeals declined to a political
review the State Supreme Court Appellate Division’s decision. The MTA had prevailed. decision for the
Downstate New York’s riding and driving public may have felt deceived and ill-used by Legislature to
the transportation authority’s accountants, budget analysts, public hearing planners and determine.”
board; but the courts, interpreting the letter of the law, found no law had been broken.
The MTA’s fare and toll increases remained in effect, as they had throughout the lengthy
appeals proceedings. In essence, nothing changed — including, as Times reporter Kennedy
observed in July, when the State Supreme Court’s Appellate Division had handed down its
decision, later upheld by the Court of Appeals, that “one thing has become clear: the almost
unassailable power of the [MTA] under the state’s Public Authorities Law to determine
how much money it needs from riders.” 25
The Metropolitan Transportation Authority is, in terms of its operating
budget, one of New York State’s largest public authorities. But it is without doubt the
most visible of those authorities and has more direct impact on the daily lives of more New
Yorkers than any other agency of its kind. The MTA logo is emblazoned on every public
bus and subway and commuter rail car, and prominently posted at every bridge and tunnel
toll crossing it operates. Whenever there are long lines, delayed arrivals and departures or
service breakdowns at its facilities, commuters and day-trippers alike know instantly where
the fault lies, if not precisely who or what is to blame.
Yet familiarity is not the same as knowledge, and there remains vast confusion
among New Yorkers as to what public authorities are and how they function. Much of
this confusion stems from the term “public authority,” and from the visible trappings of
how they are governed. Members of public authorities boards, like those of the MTA, may
24 Randy Kennedy, “Affirming Increase, Court Rules Fares are M.T.A.’s Call,” New York
Times, July 16, 2003.
25 Randy Kennedy, “Effort to Void Transit Fare Increase Dies in Court,” New York Times,
September 24, 2003; “Affirming Increase…,” New York Times, July 16, 2003.
13

16. New York State’s “Secret Government”
take their posts after being nominated by elected officials, undergo confirmation hearings
by members of an appropriate legislative committee, and then receive the consent of the
legislature. Portions of the boards’ meetings at which votes are taken may be open to the
public and press. The boards — as in the case of the MTA, but not its subsidiary, the
Triborough Bridge and Tunnel Authority — may be legally required to hold public forums
If not the when it proposes to increase user fees. Those fees, along with other dedicated state and local
public, then revenues, as well as direct subsidies voted by state and local governments, may underwrite
who is a public a crucial portion of an authority’s annual operating budget. All of these arrangements tend
authority’s true to leave the impression that a public authority is a creature of the public and therefore
answerable to the public. But, in fact, as reporting of the MTA showed in 2003 and 2008
constituency?
— if the reporting is read carefully — vastly more authority is vested in a public authority
The answer
than it is in the public.
is: its Another name for the entity commonly known as a public authority is “public-benefit
bondholders. corporation.” That term is found in New York State’s Public Authorities Law, used virtually
interchangeably with the term “public authority,” and is slightly more evocative of the true
relationship between the entity and the public. The corporation (read also: authority) exists
to benefit the public through services it was created to provide. The public is passive: it
merely consumes those services, and has no legal right or power to determine or direct
what those services are or the costs for providing or using them. Such rights and powers are
vested in the entity’s board — and there are no shareholders.
If not the public, then who is a public authority’s/public-benefit corporation’s true
constituency? The answer is: its bondholders. This would have been apparent to anyone who
paid close and careful attention to reporting of the controversy over the MTA’s decision to
raise user fees in 2003. Todd Whitestone, managing director of Standard & Poor’s public
finance department, told The New York Times that devoting one year’s surplus to pay down
future debt was not an unusual budgeting procedure among government agencies. “In fact,”
he said, “I would say it’s a relatively prudent thing to do.” When he spoke to the newspaper,
Whitestone was preparing to meet with the MTA’s financial and legal representatives
regarding a rating for $500 million of municipal bonds the authority planned to sell in
the coming month. 26 And as State Comptroller Alan Hevesi had demonstrated in his
analysis of the MTA’s finances, the authority, indeed, had had a surplus on hand that
could have carried it through 2003 without the need to increase its fares and tolls that year.
But the MTA’s financial planners and its board chose to shift that surplus forward, thus
creating a deficit for 2003, and to raise fares and tolls in order to pay down debt owed to
bondholders.
Only by demonstrating that it could continue to pay the debt it already owed could
the MTA continue to sell more bonds at the lowest possible interest rate available in order
to raise funds to continue operating its transportation system. In determining its user-fee
structure, the MTA’s first consideration was its ability to meet the needs of Wall Street’s
bond market. The commuting public’s fees were a means to that end. Commuters who
26 Randy Kennedy, “For M.T.A., Bottom Line Is a Matter of Credibility,” New York Times,
April 24, 2003.
14

17. The Hugh L. Carey Center for Government Reform • Wagner College
used the system may have thought that their fees paid for its operation and therefore gave
them a considerable voice when the authority set about determining the fares and tolls
they paid. Certainly, the MTA’s legally mandated obligation to hold public hearings prior
to its board’s voting for such increases conveyed that impression. The reality, however, is
different, as decisions by the upper levels of the state’s court system made clear. Those
decisions also made clear that if the commuting public wanted any remedies in the way the
authority conducted its affairs, those remedies would have to be sought not from the courts,
but from the state legislature. The problem with that solution is that the State of New York
has become addicted to public authorities, and exerting control over their activities and
finances presents hard choices that legislators, who must face voting taxpayers every two
years, are loathe to make.
15

18. New York State’s “Secret Government”
III.
From “Full Faith and Credit” to “Moral Obligation”:
How New York’s Public Authorities Just Grew and Grew
Best of all, New York’s first public authority was created in 1921: the Port Authority of
from the New York. 27 Frequently referred to as “the Port of Authority,” it was formed to ensure
perspective of uninterrupted financing in order to develop shipping and rail facilities in New York and
each state’s New Jersey harbor region at the mouth of the Hudson River. Previous attempts to do so
had limped along for decades because the financial scale of the undertaking was enormous
legislators,
and beyond the resources of the private sector. Political leaders in both states initially
voters would
agreed to underwrite the project with legislative appropriations, but ups and downs in the
have no economy, cost overruns and changes in political fortune in Albany and Trenton challenged
grounds on the legislatures’ capacities to appropriate steady streams of revenue to keep the project on
which to accuse schedule. New York, in particular, was hampered by debt-limitation provisions written into
them of raising its constitution in 1846, a product of prior experience in funding construction of the Erie
taxes, because Canal and railroads, which had created massive state indebtedness and taxpayer revolts.
funding for the Handing financing and administration to a public authority helped to solve these
projects came fundamental problems. The governor of each state appointed an equal number of members
from the bond to set priorities and oversee development, and the authority was empowered to sell bonds
market, not to the public, to be repaid with revenues generated by fees for using the harbor’s facilities.
public coffers. Gone were worries that New York’s or New Jersey’s legislature — or both — might balk
at appropriating funds and thereby throw development off schedule. Best of all, from the
perspective of each state’s legislators, voters would have no grounds on which to accuse
them of raising taxes, because funding for the port projects came from the nation’s private-
sector bond market, not public coffers.
A decade later, Robert Moses became a savior to thousands of New Yorkers as the
head of a host of public authorities created to leverage federal funds for public works
projects. In The Power Broker, Robert Caro describes how banks and brokerage firms were
at first reluctant to underwrite bonds for Moses’ Triborough Bridge, linking Manhattan,
Queens and the Bronx. They were skeptical that the project could succeed financially,
given its massive cost and constraints on consumer spending during the Great Depression.
Doubt turned to enthusiasm, however, when motorists flowed through the bridge’s toll
plaza in a seemingly endless stream, glad to avoid delays on East River barges that had
heretofore ferried automobiles from one borough to another. In fact, so much toll money
flowed into the Triborough Bridge Authority’s coffers that Moses discovered he could pay
bondholders years before the bonds’ due date by refinancing the bonds through a new
27 In 1972, its name was changed to the Port Authority of New York and New Jersey,
to reflect its bi-state governance and functions. For a brief outline of the development of public
authorities in New York, see Public Authority Reform: Reining in New York’s Secret Government
(Albany: Office of the State Comptroller, February 2004), 3-10. The principal author was Deputy
Comptroller Margaret M. Sherman. (Hereinafter cited as Reining…) [http://www.osc.state.ny.us/
press/releases/feb04/publicauthorityreform.pdf]
16

19. The Hugh L. Carey Center for Government Reform • Wagner College
bond issue. Holders of the initial bonds were delighted to get their money back early, and
with interest; and banks and brokerages, weaned from their skepticism by the bridge’s
steady flow of revenue, eagerly snapped up the new bonds. Delighted, too, were the city’s
politicians and labor unions: Moses’ public authorities — in 1933, he headed three others, in
addition to the Triborough Bridge, all created that year — provided thousands of jobs for
construction workers, engineers, architects, accountants, attorneys, even law enforcement In the 1960s,
officers (his authorities were empowered to recruit and maintain their own police forces), the state
few of whom were on city or state payrolls, but all of whom replenished public coffers legislature
by paying local and state taxes. The public quickly became accustomed to looking upon began
Robert Moses as a miracle worker for his ability to raise and spend millions of dollars to
sanctioning
“get things done” without draining taxpayers’ wallets. Another three decades would pass
public
before the public and politicians finally turned on him, disgusted with his high-handed
arrogance and belatedly awakened to the fact that his highway projects had destroyed
authorities
viable neighborhoods and were choking the metropolitan region with traffic and pollution.
whose
Moses passed from the scene, but the instrument with which he worked his miracles, the functions were
public authority, lived on, its luster undiminished. 28 increasingly
The growth of public authorities as a means to finance expensive construction projects divorced from
without unduly stressing state and local public finances occasionally raised concern. During direct revenue-
a state constitutional convention held in 1938, delegates worried that public authorities were producing
carrying out functions traditionally performed by state agencies, and were exposing the state streams.
to liabilities for debt undertaken by authorities. At the time, some forty public authorities
existed in New York. That year, the state adopted a constitutional amendment mandating
that authorities could henceforth be created solely by a special act of the legislature.
The amendment, and the onset of the Second World War, slowed creation of
additional public authorities, but in the postwar period their number continued to grow.
By 1956, another twenty-four authorities had been approved. A handful were designated to
build bridges or ports; most were devoted to water treatment and distribution systems, or
construction of parking garages and facilities, emblematic of the era’s economic expansion
and burgeoning suburbanization. All shared a common characteristic: they generated
fee-based revenue that could guarantee repayment of the bonds issued to construct and
maintain the project.
In the 1960s, however, the state legislature began sanctioning public authorities whose
functions were increasingly divorced from direct revenue-producing streams. Described as
“financial-type” authorities, these entities sold bonds to finance construction of facilities
that the authority did not itself operate. Rather, these authorities leased their facilities
to the state, which then paid the authorities through revenues derived from specially
designated taxes or fees.
Another innovation in financing, devised in 1960 with the assistance of a then little-
known Manhattan attorney named John N. Mitchell, was the “moral obligation” bond,
28 Robert Caro, The Power Broker: Robert Moses and the Fall of New York (New York:
Random House, 1975). See chapter 28 on the financing of the Triborough Bridge project.
17

20. New York State’s “Secret Government”
as distinct from the general obligation bond. 29 The latter, and more traditional, financial
instrument is backed by the “full faith and credit” of the state, meaning state tax revenue;
and in New York, that in turn meant that the bond issue had to be approved by voters
during a general election. Should an authority funded through general obligation bonds
default on its payments to bondholders because its revenues were insufficient to meet that
A moral demand, the terms of a general obligation bond guarantee that bondholders have first
obligation call on whatever funds are in the state’s coffers, and that if there are insufficient funds in
bond simply the state’s treasury the state will make good on repaying the bonds with interest, even if
promises that legislators have to raise additional taxes to do so. A moral obligation bond, on the other
hand, makes no such explicit guarantee. Rather, it simply promises that in the event of
in the event
default, the state has a “moral obligation” to make good on the bond. And the state did not
of default,
have to ask voters to approve issuance of such bonds because, technically, there is no legal
the state has commitment that the state back them. 30
a “moral So long as the state’s economy remained sound and an authority generated sufficient
obligation” revenue to pay the lease fees for the newly created financial-type authorities, New Yorkers
to make good had no reason to inquire too closely into the implications of moral obligation bonds. Then,
on the bond. in the waning days of 1974, one of the state’s largest financial-type authorities, the Urban
And the state Development Corporation (UDC), found itself with over $1 billion in outstanding bonds,
did not have operating costs of $1 million a day, and no funds to meet its obligations to bondholders.
to ask voters The UDC was a model of the new type of authority. Created in 1968 as a response to
to approve inner-city turmoil in New York’s urban areas, Governor Nelson Rockefeller launched an
issuance of initiative to build new low- and moderate-income housing throughout the state. UDC was
such bonds. designed to leverage federal funds provided by the federal Department of Housing and
Urban Development (HUD) to subsidize new construction. During President Richard
Nixon’s first administration (1969-1973), HUD Secretary George Romney and UDC
Director Edward Logue had what The New York Times described as a notably “cooperative”
relationship, which led Logue “to go into construction in advance of a signed contract from
HUD assuring the availability of the subsidies necessary to market the housing.” 31
But in 1973, those federal subsidies dried up. Following Nixon’s reelection, Romney
left HUD. One of his parting acts was to announce a nationwide moratorium on new
commitments to housing subsidies, reflecting the administration’s “disillusionment” with
the program. UDC, which had sold a little more than $1 billion in moral-obligation bonds
in anticipation of HUD funds, found itself, in late December 1974, with half-finished,
29 Thirteen years later, Mitchell gained wider public renown in Washington as Attorney-
General of the United States under President Richard M. Nixon.
30 Alfonse A. Narvaez, “Levitt Warns on Public Authority Debt,” New York Times, January
20, 1975, describes the terms of the new bond instrument. Robert J. Cole, “U.D.C. Default Stirs
Fear of ‘Moral Obligation’ Bonds,” New York Times, March 24, 1975, identifies John N. Mitchell as
a major figure in creation of the financial instruments. By 1975, seventeen public authorities in New
York State were issuing moral obligation bonds; see “State Agency Gets Loan at 9.6 Rate,” New
York Times, April 24, 1975.
31 Alan S. Oser, “How the U.D.C.’s Reach Came to Exceed Its Grasp,” New York Times,
March 16, 1975.
18

21. The Hugh L. Carey Center for Government Reform • Wagner College
multimillion dollar projects on its hands, no money to complete them and a deadline to
make payments on the bonds in late February 1975. Malcolm Wilson, Rockefeller’s successor
as governor, who a month before had been defeated for election, handed the problem to his
successor, Hugh Carey. 32
Carey, who six months later would be embroiled in a much larger and more protracted
effort to save New York City from bankruptcy, first approached the state’s (and the nation’s) The major
largest commercial banks, traditionally the initial syndicators of state bonds, to refinance benefit derived
UDC’s notes. Nine of eleven banks refused. On Tuesday, February 18, UDC was technically from moral-
in default when it was unable to pay $100 million in notes and $4.5 million in accrued obligation
interest. The authority’s collapse was barely averted when Carey and the new chairman of
bonds was
UDC, Richard Ravitch, succeeded in wresting a $90 million appropriation from the state
their ability to
legislature for a state Project Finance Agency (Ravitch and Carey had originally asked for
$110 million, but Albany’s lawmakers balked), which was enough to keep the authority
allow the State
functioning for the next two months. 33
of New York to
UDC’s brush with default demonstrated that the major benefit derived from circumvent its
moral-obligation bonds was their ability to allow the State of New York to circumvent constitution’s
its constitution’s requirement that voters approve bond issues before the state took on requirement
massive amounts of debt. Moreover, the UDC crisis demonstrated that public authorities, that voters
at least the finance-type authorities launched during the 1960s, did not automatically shift approve bond
the costs of their activities from taxpayers to bondholders and those who paid fees to use issues before
the authorities’ services. Moral obligation bonds may not include language that the state the state took
is legally obligated to pay off the bonds in case of default, but when the UDC went into on massive
technical default, the state — meaning its taxpayers — paid nevertheless, in the form of amounts
the legislature’s emergency appropriation to bail out the bankrupt authority. The state was of debt.
forced to come to the UDC’s rescue because not to do so would have dried up other lines
of credit, endangering, as New York City discovered a few months later when it went into
default, such routine activities as issuing payroll checks to its employees.
As it was, the UDC debacle ricocheted through the state and national economies.
The bond market, rendered skittish by troubles in New York, either backed away from
bond issues by other states’ housing agencies, as in Michigan, or demanded higher interest
rates, as in New Jersey. In the latter instance, the acting executive director of the New
Jersey Housing Finance Agency reported that $54 million in short-term notes issued a
month after UDC’s technical default commanded rates of 7.4 to 7.9 percent; he estimated
that, without UDC’s problems, they would have sold at 6 percent. 34 New York was hit
even harder: in April 1975, the Medical-Care Facilities Finance Agency was forced to pay
interest of 9.6253 percent on a $62 million bond issue, and 10.04 percent to sell $72 million
32 On Governor Wilson’s knowledge of UDC’s state, see Linda Greenhouse, “After 5
Months, the Crisis Mood at U.D.C. Gives Way to a Steady Salvage Operation,” New York Times,
July 24, 1975.
33 Ibid.
34 Joseph P. Fried, “U.D.C.’s Ripple Effect,” New York Times, April 3, 1975.
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22. New York State’s “Secret Government”
of State Dormitory Authority bonds a month later. 35
That bond buyers got extra interest for their risk in buying these notes meant that
the people who used the facilities or services of these authorities paid higher fees than
they would have had the interest rates been lower, because the amount of repayment of the
bonds and interest was greater in the aftermath of UDC’s troubles. What had once looked
What had like an endless free lunch was revealed to have the potential for being an unexpectedly
once looked expensive meal, indeed.
like an endless Reeling backward from a fiscal abyss, the legislature made a show of reining in public
free lunch authorities’ ability to take on excessive debt. But, as will be seen in subsequent efforts
heralded as major reform, measures enacted in 1976 were more cosmetic than effective.
was revealed
Since UDC had issued bonds whose face value far exceeded the entity’s capacity to redeem
to have the
them given its revenue stream, the legislature passed a law capping the amount of moral
potential obligation debt authorities could issue. Nevertheless, when in subsequent years authorities
for being an began to reach those limits, it became customary to ask the legislature to increase the caps
unexpectedly — which it did, routinely. 36
expensive The legislature also created a Public Authority Control Board, to which eleven of the
meal. state’s largest authorities were required to submit “applications for approval of financing
and construction of any project proposed.” The board is composed of a five-member panel,
consisting of representatives of the governor, Assembly speaker, Senate majority leader,
and of the leaders of the Assembly and Senate minorities. Final say is in the hands of the
first three, since the minority representatives may ask questions, but may not vote. Though
its meetings are open to the public and press, the ways in which it reaches decisions are
notoriously opaque. All three voting members must assent to any application for it to be
approved, but rarely do any of them provide reasons for their votes. In fact, applications
have been disapproved when one of the three voting members has abstained from or by
not showing up for a vote — a procedure which, in the absence of a requirement to state
a reason for a vote, leaves the public none the wiser about the merits of a project, and has
raised suspicions that the board has become a tool of the state’s “big three” political leaders
to engage in horse-trading on other legislative proposals that may or not be related to public
authorities. 37
With these palliative measures in place, New York then proceeded over the next
twenty-five years to create thirteen major additional authorities and a host of smaller
entities to address needs ranging from horse breeding and thoroughbred racing to paying
state aid to local governments on time and rescuing county-operated hospitals.
New York’s thirst for growth — and indebtedness — remained unslaked.
35 “State Agency…,” New York Times, April 24, 1975. “Bonds of State University Sold at
Record-High Rate of Interest,” New York Times, June 26, 1975.
36 Reining…, footnote 6, cited in footnote 27, above.
37 See Seymour Lachman and Robert Polner, Three Men in a Room: The Inside Story of
Power and Betrayal in an American Statehouse (New York: The New Press, 2006), 143-145.
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23. The Hugh L. Carey Center for Government Reform • Wagner College
IV.
“New York’s Secret Government”
A lmost three decades passed before an elected official — New York State Comptroller
Alan Hevesi — launched a serious campaign intended to make the state face up to the Hevesi was
problems posed by unchecked growth of public authority debt. That the first engagement attuned to the
took place when he locked horns with the MTA over its fare hike proposal in 2003 should amount of debt
not have come as a surprise. that deficits
Hevesi had arrived in Albany as New York State’s comptroller in 2002 after having
piled up and
served the previous eight years as New York City’s comptroller. City and state politics were
the dangers
his life. Elected to the state Assembly at the age of 30 in 1971, he earned a doctorate that
same year from Columbia University with a dissertation entitled “Legislative Leadership
they posed if
in New York State.” He went on to serve in Albany’s lower house for the next twenty-
they threatened
two years, while also teaching political science as a member of the Queens College-City to outrun the
University of New York faculty. In 1989, he made an unsuccessful run for New York City tax base.
comptroller while still in the Assembly; in 2001, his tenure as comptroller about to end due
to term limits, he failed in a primary bid to become the Democratic nominee for mayor. He
then ran and lost to Republican Rudolph Giuliani as the Liberal Party’s candidate. A year
later, he returned to Albany after winning a race to become state comptroller.
In the nation’s largest and most politically liberal city, Hevesi cut an unusual figure:
he was a debt-hawk Democratic. He wasn’t opposed to budget deficits when necessary;
Keynes and FDR had settled that argument during the Great Depression. But Hevesi was
attuned to the amount of debt that deficits piled up and the dangers they posed if they
threatened to outrun the city’s tax base. He became known for his warnings about debt.
But his two terms in office occurred during the boom years of the Clinton economy, when
Wall Street and real estate, increasingly the largest sectors of the city’s economy, were flush
with cash, and his warnings were usually brushed aside as jeremiads.
Hevesi garnered popular — and favorable — attention, though, with his audits of
local government agencies, exposing waste, malfeasance and incompetence. He assembled
a good staff of auditors and press release writers who were skilled at zeroing in on egregious
practices and then describing them with headline-grabbing phrases. These were the tactics
he loosed on the MTA in the winter and early spring of 2003; and though he failed to roll
back the authority’s fare and toll hikes, he succeeded in forcing the transportation giant to
become more transparent and more accountable in its expenditures of public monies.
Ten months after the MTA battle, in February 2003 his Albany office released a 55-
page report entitled Public Authority Reform: Reining in New York’s Secret Government. 38
It was a sober, straightforward document, without partisan rhetoric or finger pointing,
designed to lay out the growth of public authorities and of public authority debt; the lack
of sufficient mechanisms for exercising oversight over authority expenditures and debt; and
suggested measures for reform.
38 See footnote 27, above, for complete bibliographical citation
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24. New York State’s “Secret Government”
How many public authorities did New York State have? The last time officials had
attempted to count the number of the state’s public authorities, they had thrown up
their hands in exasperation. “At present,” reported a State Commission on Government
Integrity in 1996, “so far as Commission staff has been able to determine, no one has even
an approximate count of how many of these organizations exist, where they are, much
In 1996, a State less an accounting of what they do.” The best the commission could do was to make
Commission on reference in a footnote to the 1985 edition of the Local Government Handbook, published
Government by the Governor’s Office, which said there were 46 statewide or regional authorities, and
Integrity “about” 529 local authorities. 39 Hevesi’s staff, however, was able to nail down the number
with some greater precision — 643 — and provided a listing that extended over seven
reported that
double-columned pages in a type-size usually reserved for classified ads and legal notices in
“so far as
newspapers’ back pages. 40
Commission Some, like the Dormitory Authority — which despite its name, plays a major role
staff has in financing hospital and other large construction projects throughout the state — had
been able to immense operating budgets. Others, like the Overcoat Development Corporation,
determine, apparently existed in name only. 41 To bring some order to this welter of entities, the report
no one has assigned each of the 643 to a class:
even an Class A (169 authorities) comprised “[m]ajor public authorities with statewide or
approximate regional significance and their subsidiaries”;
count of how Class B (43 authorities) were “affiliated with a State agency, or entities created by the
many of these State that have limited jurisdiction but a majority of Board appointments made by the
organizations Governor or other State officials”;
exist, where Class C (425 authorities) consisted of “[e]ntities with local jurisdiction”; and
they are, Class D (6 authorities) was composed of “[e]ntities with interstate or international
much less an jurisdiction and their subsidiaries[.]” 42
How much public authority debt was the state responsible for? Of the 643 public
accounting of
authorities the Comptroller’s Office identified, 17 stood out for particular discussion. Each
what they do.”
was a Class A authority, and, at the close of 2002, each carried more than $100 million in
debt, for a combined total of $105 billion of debt.
39 The statement appeared in “Underground Government: A Preliminary Report on
Authorities and Other Public Corporations,” issued by the State Commission on Public Integrity,
1996; cited in Lachman and Polner, Three Men in a Room, 133.
40 Reining…, 14, 47-53.
41 The Overcoat Development Corporation, a subsidiary of the Empire State Development
Corporation mega-authority, was created in 1986 in hopes of luring an Indiana clothing manufacturer
to move its operations to the town of Amsterdam, in the Mohawk Valley region of central New
York. The manufacturer never relocated, but the corporation remained in existence, at least on New
York State’s books. In March 2004, following release of Hevesi’s report, Dan Barry wrote a breezy
feature story for The New York Times, describing his unsuccessful search to locate anyone who
would speak on the record about the Overcoat Development Corporation and its activities; “About
New York: The Cold Facts of Officialdom, Albany-Style,” New York Times, March 20, 2004. The
ODC became a poster child for New York State’s penchant for creating public authorities.
42 Reining…, 14
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25. The Hugh L. Carey Center for Government Reform • Wagner College
Hevesi’s office, however, was most interested in how much of this debt was state-
supported, meaning: How much were the state’s taxpayers, who had never had an
opportunity to vote on running up this debt, responsible to pay off in the event one or more
of these authorities someday found itself, like the Urban Development Corporation in 1975,
unable to meet its bond obligations?
The answer was: nine of the seventeen Class A authorities identified were responsible Debt service
for $34 billion of state-supported debt, which in turn accounted for 90 percent of all state- payments
supported debt. would soon
To put this in perspective, the report noted, first, that 17 years earlier, in 1985, all outstrip the
state-supported debt totaled only $5.7 billion, and accounted for only 60 percent of that
state’s general
debt. Second, general obligation debt — debt backed by the “full faith and credit” of the
obligation debt,
state that New Yorkers had approved by voting to tax themselves — had remained fairly
steady since 1985, and in 2002 stood at approximately $3.4 billion — one tenth the amount
if the proposed
of the public authorities’ state-supported debt, and which voters had had no opportunity
capital plan
to approve or reject. were adopted.
Moreover, service payments on this debt — consisting of interest payments on bonds,
plus funds regularly set aside to repay the bonds’ principal when they were finally redeemed
— was increasing rapidly because of the state’s reliance on public authority financing.
Hevesi’s report noted that, under the proposed capital spending plan outlined in the state’s
2004-05 Executive Budget, which projected such spending over the next four years, debt
service costs would increase more than 60 percent, from $2.9 billion in 2004-05 to $4.6
billion in 2008-09. 43
In other words, debt service payments — the factor that had been cited only a year
earlier by the MTA as crucial in its decision to raise fares and tolls — would soon outstrip
the state’s general obligation debt, if the proposed 2004-05 capital plan were adopted.
How comprehensive and effective was oversight of the state’s public authorities? The
report carefully noted that the authorities, though “creatures of New York State and local
governments,” were specifically designed to be able to “operate independently and with
more flexibility” than state agencies, which are dependent on legislative appropriation
cycles and oversight. Still, the report continued, “certain oversight mechanisms have been
put in place.” However, a close reading of the report indicated that those mechanisms were,
at best, spotty and frequently far from effective.
Despite its name, the Public Authorities Control Board (PACB), created in 1976
following the Urban Development Corporation’s near default, had oversight over 11 of
the state’s 643 public authorities. Of the 11, seven were among the nine authorities that
accounted for 90 percent of New York’s $34 billion of state-supported debt; and those
seven subject to PACB review, accounted for only a little over half — $19.149 billion, or
56 percent of that state-supported debt. The other four authorities not subject to PACB
oversight that were responsible for the other 44 percent — $14.643 billion — of state-
supported debt were major Class A authorities: the MTA, the New York State Thruway
Authority, the Triborough Bridge and Tunnel Authority, and the Local Government
43 Ibid., 4, 15, 17.
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