Thursday, January 07, 2010

At Senate hearing, ESDC general counsel defends BALDC, but isn't even sure she's on the board; Perkins skeptical of PACB avoidance

The state Senate hearing Tuesday chaired by Senator Bill Perkins mainly concerned eminent domain reform, blight, and the curious case of ubiquitous environmental consultant AKRF.

But some significant questions also were raised about the murky Brooklyn Arena Local Development Corporation (BALDC), which issued $511 million in tax-exempt bonds for the arena.

Notably, a BALDC board member--Anita Laremont, the Empire State Development Corporation's (ESDC) general counsel--seemed unsure she was on the board, and offered questionable explanations about why the BALDC was created and why review by the Public Authorities Control Board (PACB) was not required.

(Photos by Tracy Collins. At bottom is the full four hour-plus hearing video.)

And while the BALDC was described as "lessening the burdens of government," it also appears to be a way to avoid some governmental responsibilities, given that all the board members are governmental officials. "We know that the effort was to avoid PACB and to avoid scrutiny or accountability," Perkins said after the hearing.

BALDC questioned

The BALDC is the "creation" of the Job Development Authority (JDA), an ESDC affiliate, that did not require review by the PACB, which was set up to review debt issues by state agencies, even those that the state is not obligated to repay.

Perkins has asked Attorney General Andrew Cuomo if the process of avoiding PACB review was legal. (The additional charge that the BALDC does not deserve a tax exemption seems to be on the back burner.)

He told me he'd had conversations with the Attorney General's office as well as Comptroller Thomas DiNapoli, and indicated he expected a response this week--though he was careful to say he had no indication the state officials shared his conclusions.

From the hearing

While three representatives of the ESDC, including Executive Director Peter Davidson and Executive VP Darren Bloch, were at the witness table, only Laremont answered questions about the BALDC.



"What is the precedent for the use of a Local Development Corporation to do the bond issuance?" Perkins asked.

Laremont said that "we've used LDCs for a number of projects," including the issuance of Liberty Bonds, via the Liberty Development Corporation.

Perkins asked if there's a difference between the Liberty LDC and the BALDC.

Laremont said no, that they were both created under the same not-for-profit corporation law.

PACB scrutiny and ESDC obligations

Perkins cited his concern that the scrutiny of the PACB was circumvented, leading to a lack of transparency and accountability.

"The reason we use an LDC in these circumstances is that these are conduit issues," Laremont said. "They are not issues where the state's credit, or ESDC, is on the hook, not at all. It means that, when these bonds are sold, the story that is told to the bond holders, and the legal agreement, does not include either ESDC or the state. It is simply related to the credit of the Atlantic Yards arena development, it has nothing to do with the state. If we did these kind of issues either through the UDC or any other state entity, it would be an issue that would be our obligation. We are simply a conduit."

That comment drew a rebuttal after the hearing from Amy Lavine, a staff attorney at Albany Law School's Government Law Center, who in her job is helping Perkins with research on the BALDC and eminent domain. (She's also offering pro bono help for Develop Don't Destroy Brooklyn.)

Lavine said, "Laremont's explanation that they had to use an LDC in order to avoid issuing ESDC-backed debt was incorrect. The UDC Act expressly allows ESDC to issue the same type of bonds that are only backed by dedicated revenue streams, and not the full faith of the corporation."

Perkins asked if the BALDC was a subsidiary. Laremont said no.

Are the bonds moral obligation bonds? Laremont said no, that they're backed only by developer Forest City Ratner.

Why? "Because we are not at all interested in implicating the state or UDC [Urban Development Corporation, the ESDC's formal name] for any default," Laremont responded. (She's pictured with Executive Director Peter Davidson.)

BALDC structure and oversight

Perkins asked if there are any government oversights over the LDC finances.

Laremont said the LDC reports its finance as part of its public authority accounting--though she at first suggested they might be part of consolidated financial statements, then withdrew that. As to transparency, she added, "I'd point out that the fact that this was going to occur was in the General Project Plan."

Actually, the 2009 Modified General Project Plan mentions an LDC but not the BALDC, and asserts it would be organized by the ESDC rather than the JDA:
In the case of the Arena site, ESDC would lease the land for $1.00 to a Local Development Corporation ("LDC") organized under Article 14 of the Not-for-Profit Corporations Law. Subject to compliance with applicable Internal Revenue Service regulations, the LDC, which is expected to be organized at the direction of ESDC, will issue one or more series of tax-exempt "PILOT" bonds to pay the costs of constructing and fitting-out the Arena and its ancillary facilities.
"Do you serve on the LDC?" Perkins asked.

"Yes, I think I'm on the board of that, I am," Laremont responded, somewhat uncertainly. (She's on the board.)

Perkins asked about the other members.

"Let me get you a list." Laremont responded, again a bit uncertainly. "[ESDC] Chairman [Dennis] Mullen is on the board... I'm not positive."

Lavine commented afterward, "The fact that Laremont couldn't name a single other board member on the BALDC, or even state with confidence that she herself is a board member, emphasizes the need for PACB review even more. Without this sort of review you get state officials like Laremont placed on shadowy boards and making deals that they don't take seriously and that they may not fully understand."

"Lessening the burdens of government"

In the dialogue with Perkins, Laremont again stressed that the BALDC is a not-for-profit corporation.

"With government sitting on it?" Perkins asked.

"Yes, lessening the burdens of government," she responded.

"Which does not have to go through PACB," Perkins stated.

Laremont agreed, saying there is no risk to the state or its credit.

Lavine commented, "Laremont was also incorrect in claiming that this type of 'non-recourse' debt isn't subject to PACB review. The PACB was created (24 MB report) after UDC defaulted on $100 million of bonds in 1975. Even though the state wasn't legally liable for those bonds, it realized that it had to bail out the UDC because private investors would otherwise lose confidence in all state and municipal bonds issued in New York. The point of the PACB was to make sure that the biggest public authorities were making prudent and responsible investments, since those investments, whether direct obligations of the state or not, can have serious, even catastrophic, repercussions for state and local government finances."

(The issue of PACB review, obviously, remains a contested one, as Cuomo's opinion is awaited.)

Perkins asked if the comptroller or Attorney General had any oversight.

"I'm sure the Attorney General has some oversight," Laremont responded, given that that office oversees not-for-profit corporations. (Executive VP Darren Bloch is at right.)

Perkins read a list of the board members, noting that all are state government officials. "Are there any other nongovernment officials on this board?" he asked.

No, responded Laremont.

Closing documents

Perkins asked if the master closing documents were ready to be released.

Laremont said the ESDC had gotten a request--unmentioned: from AYR--and was working on it.

"You don't have them," Perkins said. "Who do we see at the BALDC to get them?"

Laremont said the documents need to be delivered from the law firm that completed the master closing. (Yesterday, the ESDC announced they'd be made available in the coming weeks.)

Note an interesting juxtaposition in the last few seconds of the video above, the ESDC representatives return to a row of seats where AY opponent Daniel Goldstein, who arrived after the hearing began, was sitting.

Perkins comments

After the hearing, I asked Perkins about the BALDC.



What came out of the letter he sent to Cuomo?

"We've had a conversation with the Attorney General's office, about a week ago," Perkins responded. "They were positive in terms of wanting to look at it further and to see the role that they could play. They recognized that this could be a problem worthy of their attention, and would be getting back to us this week probably. They understand the urgency of their decision... y'know, we're hopeful that they do something."

Anything else related to Atlantic Yards? "I had some conversation with the Comptroller, directly, and he's going to look into it as well," Perkins said, cautioning that they haven't promised they'd agree with his take.

I pointed to testimony from Noticing New York's Michael D.D. White, a former state housing finance official, who questioned Laremont's statement that a state guarantee of an agency’s obligations necessitates PACB review.

He told Perkins that his old agency issued billions of dollars in bonds that were nonrecourse but went to the PACB.

Perkins noted that one of the reasons witnesses were sworn in was to hold them accountable.

White even suggested that the announced--and later withdrawn--plan for the BALDC to issue $400 million in infrastructure bonds looks "like a backdoor state guarantee."

The full hearing

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