The great LDC extinction

Cheryl Dinolfo’s pledge to
eliminate local development corporations in Monroe County may be less a stand
for integrity than a reflection of the fact that LDC’s just aren’t as useful to
governments as they once were.

Dinolfo, a Republican, announced
her bid for county executive last month. She has been pegged as current county
executive Maggie Brooks’ heir since becoming county clerk over a decade ago, so
her announcement didn’t shock.

But Dinolfo’s LDC pledge did catch
a few people off guard, considering that Brooks has steadfastly defended the
county’s LDC’s through scathing state audits, an investigation by the state
attorney general’s office, and the arrests of some key LDC players, including
Brooks’ husband, on bid-rigging charges.

LDC’s are quasi-governmental
bodies typically formed for a singular purpose. The county set up the
Civic Center Monroe County LDC, for example, to buy the Civic
Center parking garage. LDC’s are supposed to save money — though there’s
some argument about whether they really do — and they can operate with more
flexibility than governments typically can.

But the
corporations have faced criticism for a lack of oversight and regulation, which
create fertile grounds for abuse.

The shrapnel from the county’s LDC implosion probably
contributed to Brooks’ loss to Democrat Louise Slaughter in a high-profile
Congressional race in 2012. So in that sense, it’s easy to understand why
Dinolfo would want distance from that dirty diaper.

But if you buy into the theory — and many do — that local
development corporations’ main function is to hide debt and mask operational
shenanigans, then recent state efforts to rein in LDC’s may make Dinolfo’s pledge essentially moot.

Bill Reilich, chair of the Monroe
County Republican Committee, says that Dinolfo would dismantle all existing
LDC’s “wherever the law permits” and that she would not create any new
corporations.

But Paul Haney, a Democrat in the County Legislature and the
county’s former budget director, says that wiping out the current LDC’s would
be difficult.

“I’m sure with all the turmoil that the LDC’s have entailed,
she’d like to have the public think she’s going to abolish all of them, but I’m not sure she can do that,” he says.

The big question, Haney says, is what happens to the
substantial debt that the LDC’s owe. As of the end of 2011, LDC’s created by
Monroe County had a cumulative debt of about $333 million.

Reilich says that the debt would be brought on to
the county, but that he’s not a lawyer and doesn’t know the details of how that
would work.

Theoretically, the county isn’t legally responsible for LDC
debt. Practically, however, it’s highly unlikely that the debt-holders would
allow the county to wash its hands of the matter if the LDC’s were to liquate
or go bankrupt.

That’s one of the problems with LDC’s, says Brian Butry, of the state Comptroller’s Office: taxpayers might
end up on the hook for borrowing that they neither agreed to nor knew about.

The county would almost certainly never be able to borrow
another dime if it walked away from the LDC debt, Haney says. Not to mention
that giving Monroe County a pass would set a bad precedent, he says, as there
are debt-laden LDC’s across the state.

“If one starts to fall, they’re all going to start to fall,”
Haney says. “And Wall Street is not going to let the governments walk away.”

Another question: What happens to corporations’ assets, such
as the Iola power plant, if the LDC’s are wiped out? The corporations could
sell their assets to, well, anyone, Haney says, but the county is the only
realistic buyer.

Why might Dinolfo make such a promise
when Brooks, the party’s standard bearer, has consistently defended LDC’s as
innovative public-private partnerships — the way forward in an era of
tightening municipal budgets and growing financial obligations?

Quite simply, Haney says, the rules have changed. The state
Public Authorities Accountability Act of 2006 and changes in accounting rules
have increased LDC transparency and answerability, he says.

LDC’s must now adopt compensation, reimbursement and
attendance policies; adopt a code of ethics; set up websites; adopt
travel and procurement policies; and make other reforms.

The State Comptroller’s Office says that the actions don’t go
far enough — the office can’t audit the LDC’s directly, for example. But Haney
says that the changes have essentially negated the reasons that governments
were so fond of LDC’s to begin with: to hide debt and to avoid scrutiny.

“They made local development corporations basically subject
to the same rules and regulations and disclosure requirements of public
authorities and governmental entities in general,” he says.

Once that happened, Haney says, governments seemed to lose
interest in LDC’s.

“In practical terms, the main reason for having local
development corporations disappeared,” he says, “The argument always was that
they were being set up for fiscal purposes, but always behind the scenes the
reason was because they could take all kinds of stuff out of public purview and
do it under the rug. And the changes in state law and the changes in accounting
rules basically rolled the rug up so that these things are now out there in the
open.”

“When you’re under the rug, out of public oversight, you can
do all kinds of things,” Haney says. “And apparently, all kinds of things went
on.”

This article appears in Feb 25 – Mar 3, 2015.