Foes of developer Bruce Ratner’s Atlantic Yards project got the legal equivalent of a box of chocolates when a state Supreme Court judge on Valentine’s Day barred a lawyer from representing both the developer and a state development authority charged with reviewing the development.
Opponents of Forest City Ratner, the development firm, saw it as a sweet morsel amid a bitter fight over the multi-billion dollar proposed project.
The conflict of interest arose because David Paget, the lawyer for the state authority charged with producing an environmental review of the project, the Empire State Development Corporation, also worked for Forest City Ratner, on the same project. The situation, Justice Carol Edmead said, posed a “severe, crippling appearance of impropriety.”
Three days later, lawyers for the Empire State Development Corporation appealed the decision, saying that without Paget’s expertise, they would not be able to complete an environmental review of the project, which was expected to have been released in March and is necessary for the project to move forward.
The judge’s order barring Paget from working for the ESDC, its lawyer wrote in the appeal, “has brought the environmental review process respecting the Atlantic Yards project — and thus the project itself — to a screeching halt.”
Beyond the immediate ramifications for the Atlantic Yards project, the ruling, which may yet be overturned, was also a blow to the image of the Empire State Development Corporation and emblematic of the kind of setbacks the authority’s reputation has faced in the past two years. The ESDC has come under broad attack for being an opaque institution with little oversight; one that is generally more sympathetic to the needs of the developer than the local communities whose economies they are mandated to help reinvigorate. Advocates say that without the ESDC’s authority and its power, major projects in New York simply wouldn’t get done.
“In order to function well, it needs to be seen as a legitimate entity in the eyes of the public and I think in the last few years you’ve seen that erode,” says Christopher Jones, a vice president for research at the Regional Plan Association and an expert on the state’s public authorities. “To restore that, you can have greater transparency into their operations and finances.”
The Empire State Development Corporation, originally known as the New York State Urban Development Corporation, was created by the state legislature as a public benefit corporation to help revitalize blighted urban areas by offering tax incentives to businesses who invested in those communities. In 1995, it merged with the Job Development Authority to become the institution it is today, with a much broader mandate to stimulate economies throughout the state.
Last year alone, the corporation invested half a billion dollars in 502 projects across the state, totaling $5.1 billion in total investment, according to figures provided by the ESDC.
The corporation also exists to retain and create jobs. Last year, according to a spokeswoman, Glynis Gotwald, the corporation’s investments helped retain 17,582 jobs and created 7,967 new ones, accounting for about 12.8 percent of approximately 62,000 jobs created in the state, according to numbers from the state’s Department of Labor that have not been seasonally adjusted.
The ESDC’s reach goes beyond the state. In addition to its headquarters in New York and Albany and 10 regional offices across the state, it has a presence in eight countries: Canada, England, Israel, Mexico, Chile, Brazil, Japan, and South Africa.
But as the corporation has grown in scope and power, so too have its critics, who say it operates a huge budget without enough oversight. This year its proposed budget includes $624.4 million for capital projects, plus $93.8 million in direct aid to local communities. Like all authorities, the ESDC has the right to raise debt. In 2004, the authority’s outstanding liabilities totaled $6.6 billion, according to the state comptroller’s office.
“They are a poster child for what’s wrong with the authority system,” says state Assemblyman Richard Brodsky, who heads the committee that oversees the state authorities andécorporations. “They are secretive, without much regard for their board. They operate as if they are the personal playthings of the governor’s office.”
Critics like Brodsky point to the ESDC’s many subsidiaries as emblematic of its unchecked power to use public money with little public oversight. The ESDC has at least 71 subsidiaries, a number that far exceeds the typical number of subsidiaries under other public benefit corporations.
These subsidiaries are created to manage development projects. The highest profile subsidiary is arguably the Lower Manhattan Development Corporation created in the wake of September 11. Unlike the authority itself, which was created by elected officials, subsidiaries are the creation of the seven-member board (plus two ex-officio members) appointed by the governor, with little governmental oversight of its budget.
Charles Gargano, the chairman of the corporation and longtime Republican Party donor, is the state’s top economic development official and as such one of the most powerful people in the state. While the city has actively rezoned to promote development in recent years, the state has pushed forward myriad new projects which have either been approved or are on their way to being approved. Gargano and his agency have had a hand in the expansion of the Jacob Javits Convention Center, new stadiums for the Yankees and the Mets, Brooklyn Bridge Park, and making the way for the Bank of America tower and the New York Times headquarters building in Midtown Manhattan, among others. But to critics he is an unelected kingmaker who has been accused of steering contracts to political insiders. Gargano is also the vice-chairman of the board of the Port Authority of New York and New Jersey.
Brodsky, who is running for attorney general, called the ESDC a “Soviet-style bureaucracy” and “cash cow for the political class,” the latter remark a reference to a report he released in 2004.
The 2004 report said the authority expanded the boundaries of so-called Empire Zones in the Rochester area, where developers receive tax credits for their investments, to include developers who had not promised to create jobs, invest any capital, or keep jobs from moving out of state, the main purposes of the tax incentive program. The report also said that nine of 19 developers contributed more than $200,000 to Gov. Pataki during the time when they received the credits.
More recently, critics point to the clash between the authority operating the Javits Center and an ESDC subsidiary leading its expansion over the designs of the convention center’s expansion. The fight was eventually won by Gargano. The chairman of the convention center, Robert Boyle, was removed by the governor, with whom he did not agree, and replaced with a more amenable Joseph Spinnato, the president of the Hotel Association of New York.
Observers have said Boyle, whose power to govern the convention center is authorized and governed by the legislature, has his power usurped by a subsidiary created by Gargano.
That a subsidiary of an authority, with no legislative authority, dictated policy on the design of the convention center over the chairman of an authority was the inverse of what was supposed to happen, critics charged.
Compounding the crisis in confidence over the ESDC are rules that allow it, as a state public development authority, to sidestep local land-use procedures that would otherwise govern a development built in the city by an entity other than a state authority.
These rules, of course, can have far-lasting effects. More than three years after the state, through the ESDC, and the New York Times used the power of eminent domain to clear the way for the newspaper’s new 52-story headquarters on Eighth Avenue and 40th Street, almost all of the property owners and more than half of the tenants displaced by the project have not settled over compensation, the New York Sun recently reported. The issue is especially sensitive considering last year’s U.S. Supreme Court ruling in Kelo v. New London, which allows greater use of eminent domain for the sake of private economic development, and a subsequent backlash on the part of some state governments.
In New York, major projects are approved by the public authorities control board, a five-member board representing the sentiments of the state’s legislative leaders. As a result, local communities often feel left out of the process.
“It creates a situation,” Jones says, “where the authority is dealing most intensively with the development community and less with the community at large and the political process.”
Efforts at ESDC oversight increase
Efforts to create more oversight of the Empire State Development Corporation are developing on both sides of the legislative aisle. State Assemblyman Richard Brodsky, a Democrat, has introduced legislation that would create a public authorities inspector general’s office to be appointed by the state attorney general; a public authorities independent budget office; and a central procurement office to oversee contracts that are awarded. The bill would also restrict potential recipients from lobbying legislators during procurement times. Currently, the ESDC is audited by an outside firm, Urbach, Kahn & Werlin.
Gov. George Pataki has also responded. In February 2005, he created the New York State Commission on Public Authority Reform, known also as the Millstein Commission led by Ira Millstein, a Yale School of Management professor and an expert on corporate governance. The commission’s report is scheduled to be out in the coming weeks and is expected to criticize the ESDC’s proliferation of subsidiaries.
Shortly after the commission was established, ESDC chairman Charles Gargano himself made a preemptive move aimed at answering his critics. In April of last year, he announced he would eliminate 20 subsidiaries that were either outdated or unneeded. Gargano was not available to comment on the ESDC, but Glynis Gotwald, the authority’s spokeswoman, rebuffed charges that the authority’s operations were opaque. “ESD has always been open and transparent, and will continue to be,” she wrote in an email to The Real Deal.
Kathryn Wylde, president and CEO of Partnership for New York City, a business group, and member of the Millstein Commission, said the questions raised about the group have less to do with ethics than with politics. Still, she said there was a need, given the ESDC’s power, to make its dealings more transparent. “New York State has pretty extensive powers in the ESDC as the vehicle for economic development,” she says. “It’s obvious they have to be held to a high standard when it comes to transparency.”
Though the recent Atlantic Yards’ conflict of interest ruling by a state Supreme Court justice (see main story) only confirmed the suspicions of some that the ESDC may be too closely aligned with developers, many expect the ruling to be overturned eventually and the review process to continue. The bigger issue is how to balance the range of activities associated with economic development with the need to create adequate oversight. “You want somebody to be pulling together the economic development of the state,” Christopher Jones, an expert on the state’s public authorities, says of the ESDC. But, he adds, “it makes it a difficult agency to manage and evaluate. It’s a tradeoff.”