Local Development Corporations: Honest Graft?

Posted by & filed under CGR Staff, Rochester Business Journal.

Kent GardnerA story surfaced last week (in a rival publication) that brought local development corporations (LDCs) back into public view. CGR studied LDCs in 2008, and we were never able to find a “smoking gun” suggesting that an LDC had been used for evil deeds.

But we still wonder. As we recounted in our report (see http://goo.gl/IOKu), there is nothing inherently wrong with LDCs and they can be used for good. But they are expressly designed to circumnavigate the cumbersome rules we’ve established for public bodies, e.g. open meeting requirements, public bidding, etc. The simple fact that we were never able to compile a list of active LDCs should be enough to light a warning beacon.

A quick summary is in order: LDCs are typically created by local governments and are allowed to receive public property that the involved local government concludes is no longer needed for a traditional public purpose. Transfer to an LDC involves a public hearing but does not require a competitive bid process or independent valuation of the asset. Unlike the governments that create them, LDCs need not comply with public procurement laws requiring a competitive process for awarding contracts. Though many employ a competitive bidding process, LDCs may award contracts at will. LDCs are not specifically required to comply with open meetings and Freedom of Information laws (although court decisions have asserted that some are legally bound to do so while others are not).

Our report focused particular attention on Monroe Newpower LDC. The Monroe Newpower Corporation was established by Monroe County in 2002 to assume ownership of its Iola power plant and convert it from coal to natural gas. The LDC borrowed about $32 million by issuing bonds and purchased the plant from the county for $7 million. This allowed the county to reap $7 million for its budget in the year of the sale and to have the plant upgraded without issuing county debt. In exchange, the county purchases power from Monroe Newpower through a 32-year “take or pay” contract requiring the county to purchase power each year. Monroe Newpower, in turn, contracted with Siemens Building Technologies to build and operate the new power plant.

In 2004, Siemens successfully bid for the right to manage Monroe County’s phone and computer systems under the Upstate Telecommunications Corporation (UTC), yet another LDC. Last year, the involved Siemens employees formed a new venture, Navitech, and took the Monroe UTC contract with them.

When another LDC was formed, this time to purchase public safety communications equipment under a 20-year, $212 million contract with Monroe County, Navitech received the contract to run it.

Now here’s the problem: The Brooks administration has asserted that LDCs created by Monroe County would comply with open meetings laws and other restrictions imposed on public bodies. The selection of Navitech by the new LDC, Monroe Security and Safety Systems Inc (M3SI), may have been consistent with that requirement. Yet the contract to Navitech is for $340,000, a mere fraction of the total amount of cash at stake. Navitech, in turn, managed the bidding process (such as it was) for the real work.

Last week’s story in Rochester’s daily revealed that Navitech sought bids from only two vendors, Motorola and Harris RF Communications. After Navitech awarded a $30 million contract to Harris, Motorola cried foul, asserting that the bid lacked specific requirements and that the bid was uncompetitive in other ways.

Press and blog reports of the transaction suggest that personal ties among the County Administration and Navitech are involved. Whether allegations of “self-dealing” are true or not, by delegating the big money transaction to Navitech, M3SI appears to have violated the spirit of openness and transparency suggested by open meetings laws and the public bidding process. We accept the proposition that a private firm can operate more efficiently than a public entity. Perhaps complying with all of those laws would have resulted in higher cost. But that seems unlikely. Properly managed, a public bidding process that employs clear specifications and seeks bids from all comers will squeeze excess profit from prospective vendors, securing a better deal for the taxpayer. There is more to learn about how this bidding process was managed. But what we appear to know about the circumstances leaves open the possibility of self-dealing and corruption.

As we have stated previously, local development corporations pose significant risks. LDCs may operate almost entirely outside the view of the public. Without routine public disclosure, individuals who control these entities, both elected officials with appointment powers and board members, are not always fully accountable. As LDCs are not required in any systematic way to disclose information about their finances, operations and decisions, the potential for abuse and corruption is significant. There is nothing to stop LDC officials from awarding contracts, jobs, property or other favors to friends, relatives or campaign contributors or from spending money wastefully and inappropriately. LDCs open up the possibility of what George Washington Plunkitt called “honest graft” (see William Riordan’s 1905 Plunkitt of Tammany Hall).

No criminal charges could be filed if Harris got 5% more than they would have received from a competitive bid. But it still isn’t right and the public deserves better.

Kent Gardner, Ph.D. President & Chief Economist
Published in the Rochester (NY) Business Journal June 11, 2010