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A07476 Memo:

NEW YORK STATE ASSEMBLY
MEMORANDUM IN SUPPORT OF LEGISLATION
 submitted in accordance with Assembly Rule III, Sec 1(f)



 
BILL NUMBER: A7476
 
SPONSOR: Magnarelli

 
TITLE OF BILL:  An act to amend the general municipal law, in relation
to audits of governmentally controlled entities
 
 
PURPOSE:
 
To authorize the State Comptroller to audit private organizations
controlled by local government entities.
 
 
SUMMARY OF PROVISIONS:
 
Section 1 of this bill amends section 34 of the General Municipal Law to
authorize the State Comptroller to examine the financial affairs of any
organization (other than a statewide association of local governments or
local government officials) that is under the control of one or more
local government entities, including municipal corporations, school
districts, fire districts and industrial development agencies. An organ-
ization would be deemed "under the control" of a local government entity
when one or more individuals who serve as officers or employees of the
local government entity (a) select either a majority of the organiza-
tion's highest policy-making body or the organization's chief executive
officer; (b) constitute a majority of the voting strength that selects
either a majority of the organization's highest policy-making body or
the organization's chief executive officer; or (c) serve as (i) a major-
ity of the organization's highest policy-making body; (ii) the organiza-
tion's chief executive officer in his or her official capacity; or (iii)
a partner in the organization in his or her official capacity. The
phrase "a majority of the organization's highest policy-making body"
would mean a majority of the whole number of positions comprising such
body, unless such body is allowed to act by a majority of a quorum, in
which case the term would mean a majority of the quorum. Subsidiaries
and other entities controlled by the organization would also be covered.
 
Section 2 of this bill provides that this act would take effect imme-
diately.
 
 
PRIOR LEGISLATIVE HISTORY:
 
S. 4827 and A. 3047 (Passed Assembly) of 2017-2018
S. 5690-A and A. 7056-A (Passed Assembly) of 2016
S. 5690 and A. 7056 (Passed Assembly) of 2015
S. 4497 and A. 3633 (Passed Assembly) of 2013-2014
S. 7540 and A. 9689 (Passed Assembly) of 2011-2012
S. 7907 (Passed Senate) and A. 11088 of 2009-2010
 
 
JUSTIFICATION:
 
Local development corporations, as well as certain other types of
private organizations (e.g., limited liability companies), have been
utilized by counties; cities, towns, villages, and other local govern-
ments, such as fire districts, as a means to indirectly finance local
government operations and projects. Audits performed by the State Comp-
troller's Office have found these private entities have been used to
avoid constitutional or statutory provisions that apply to projects
undertaken directly by a local government entity (e.g. the prohibition
on gifts and loans to or in aid of private entities in Article VIII, § 1
of the State Constitution; referendum requirements such as those in the
Local Finance Law applicable to certain municipal bond resolutions; the
competitive bidding requirements of Article 5-A of the General Municipal
Law; and limitations on the issuance of debt such as those contained in
Article VIII, § 4 of the State Constitution).
 
Currently, the State Comptroller does not have the authority to audit
directly local development corporations and other similar types of
private organizations, even when they are controlled by a local govern-
ment entity. Instead, the Comptroller may only examine the relationship
between the local government entity and the private organization as part
of an audit of the local government entity. And even in the context of
such an audit, the Comptroller generally may not look beyond the finan-
cial or business relationship to examine the overall finances and oper-
ations of the private organization itself.  Thus, for example, the Comp-
troller may be unable to examine a private organization's internal
controls to assess whether moneys provided to the organization by a
local government entity are properly safeguarded.
 
While local development corporations and other similar types of private
organizations are established to be legally separate from the local
government entity, as a practical matter, they often function as if they
are instrumentalities of local government entities. The bill would
recognize this reality and expand the Comptroller's audit authority
commensurately to include direct audits of private organizations which
are under the control of one or more local government entities. Such
audits would provide greater assurance that these organizations are
operating in the public interest.
 
The bill's definition of "under the control" is necessary to ensure that
the Comptroller's audit authority is based on the substance, rather than
the form, of the relationship between the local government entity and
the private organization. To avoid creating incentives or disincentives
to the use of any particular type of private organization, this bill
would apply to every type of organization under the control of a munici-
pal corporation or other local government entity that is not already
subject to audit by the Comptroller, except a statewide association of
local governments or local government officials.
 
 
BUDGET IMPLICATIONS:
 
This bill has no significant fiscal impact. The fiscal impact of the
bill is limited to organizations actually audited by the Comptroller and
confined to the staff time and other resources required to cooperate
with the auditors. Any such impact would be offset by potential savings
based upon the audit findings.
 
 
EFFECTIVE DATE:
This bill would take effect immediately.