New York’s crony capitalism agency – By George J. Marlin

The following appears in the February 27-March 5, 2015 issue of the Long Island Business News:

In the aftermath of the Martin Luther King Jr. assassination in April 1968, Gov. Nelson Rockefeller forced down the throat of the state Legislature a bill that created the Urban Development Corp. This entity had a wide mandate to provide fast-track housing, industrial development and civic improvements throughout the state.

UDC’s incorporation papers stated there was “legislative intent” to supply money to meet principal and interest on outstanding bonded debt in the event of shortfalls. Since the state had no legal obligation to aid the agency, the concept became known as “moral obligation.” Designed by John Mitchell, who served as Nixon’s attorney general and 1972 campaign manager, “moral obligation” bonds constituted a financial gimmick to get around bonding limitations of the state constitution and to make dubious projects more palatable to the bond underwriters in the investment community.

In early 1975, with cutbacks in federal grants and a recession settling in, UDC had a cash-flow problem when several of its projects went belly-up. On February 25, 1975, UDC defaulted on paying off $104.5 million owed to holders of bond anticipation notes.

Within a month, Gov. Hugh Carey patched together the resources to repay the money, but UDC’s reputation as an economic engine for New York was seriously damaged.

Nevertheless, since that time, the agency has continued to toss bags of money around the state to subsidize various business projects, albeit, since 1995, under the new improved name Empire State Development Corp.

Today ESDC is a huge government leviathan saddled with more than $10.4 billion of debt (20 percent of state public authority debt outstanding), and as a February 2015 report issued by Comptroller Tom DiNapoli points out, it is the primary vehicle for “backdoor borrowing, which is conducted on behalf of the state with no requirement for voter approval.”

The agency has also created more than 200 subsidiary corporations. Audits by the state comptroller’s office have determined the entities do not have adequate oversight by ESDC and that many of them should be dissolved because they no longer serve any purpose.

The comptroller’s office as well as watchdog group Citizens Budget Commission have questioned the effectiveness of ESDC subsidiaries and tax credits. The comptroller concluded that ESDC’s “job creation prowess was relatively meager compared to the amount of state funds spent.”

In fiscal year 2013, ESDC’s total expenditures were $1.3 billion, which included economic development grants of $581 million and reimbursed grant expenses totaling $137 million.

And what was the return in fiscal year 2013 on these so-called investments? ESDC aided 201 companies statewide, which resulted in 12,355 jobs being retained and 2,424 jobs created – 1.8 percent of net private-sector job creation during that year.

Impressive results? I think not. Do the math: $1.3 billion in expenditures divided by 14,779 total jobs saved and created equals $87,962 spent for each job. That’s a lot of money per job.

Even more disturbing: ESDC does not provide the public with any comprehensive data describing how allocations are determined or if the agreed-upon goals of the companies helped are ever met. And approximately 28 percent of the companies assisted in 2013 were not chosen by ESDC but by the state Legislature.

The process, in my judgment, smacks of crony capitalism. The governor or legislative leaders can influence decisions that help their constituents, contributors or pals regardless of the merits – and the meager results prove it.

Job growth will never be sparked by government entities like ESDC. That’s because by its very nature, ESDC is driven by political interests, not economic ones. Until New York’s elected leaders abandon underperforming subsidies in favor of genuine tax cuts and regulatory and unfunded mandate reforms, the Empire State will continue to lag the nation in job growth.

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