Prohibits municipalities from forming limited liability companies to finance operations or acquisitions of assets

Summary of provisions

Section 1 of this bill adds a new subdivision (r-1) to Section 102 of the Limited Liability Company Law to define the term "municipality" for the purposes of such law.

Section 2 of this bill amends Section 201 of the Limited Liability Company Law to expressly prohibit the formation of limited liability companies to finance over a period of time a municipality's operations, or the acquisition or improvement of an asset by or for the use of a municipality.

Section 3 of this bill adds a new Section 202-a to the Limited Liability Company Law to provide that, with certain exceptions, a limited liability company shall not participate in any transaction or series of related transactions involving the payment of money over a period of time by or on behalf of a municipality located in this state and having as a purpose the financing of the municipality's operations or the acquisition or improvement of an asset by or for the use of the municipality.

Section 4 of this bill amends Subdivision 1 of Paragraph a of Section 101.00 of the Local Finance Law to clarify that no municipality, school district or district corporation shall guarantee or assume the indebtedness or obligations of any not-for-profit corporation or limited liability company fowled by, on behalf of, for the benefit of, or under the control of the municipality, school district or district corporation.

Section 5 of this bill amends Section 176.00 of the Local Finance Law to provide that the Local Finance Law shall be the exclusive law governing the manner in which municipalities, school districts and district corporations finance over a period of time their operations and the acquisition or improvement of an asset by or for the use of a municipality, school district or district corporation, unless expressly or specifically otherwise provided by general or special law.

Section 6 of this bill adds a new Subparagraph 19 to Paragraph (a) of Section 102 of the Not-For-Profit Corporation Law to define the term "municipality" for the purposes of such law.

Section 7 of this bill amends Section 204 of the Not-For-Profit Corporation Law to provide that no corporation to which the Not-For-Profit Corporation Law applies shall participate in any transaction or series of related transactions involving the payment of money over a period of time by or on behalf of a municipality and having as a purpose the financing of the municipality's operations or the acquisition or improvement of an asset by or for the use of the municipality.

Section 8 of this bill amends Paragraphs (a), (c), (d) and (i) of Section 1411 of the Not-For-Profit Corporation Law to:

*provide that no LDC shall participate in any sale or lease of real property, or generally any other transaction or series of related transactions involving, the payment of money over a period of time by or on behalf of a municipality and having as a purpose the financing of the municipality's operations or the acquisition or improvement of an asset by or for the use of the municipality; *prohibit any additional compensation for board members, other officers and employees of LDCs in instances when a municipality caused the formation of the LDC if those individuals serve or have served as officers or employees of the municipality; *require that any contract between a local government and an LDC be for fair and adequate consideration, subject to the requirements of Article 5-A of the General Municipal Law; and *require that the public notice of any sale or lease of municipally owned real property to an LDC include a description of the property to be sold or leased, the estimated full market value of the property, the consideration to be received by the municipality, and a statement of the intended use or disposition of the property by the LDC.

These amendments in Section 8 of the bill would apply to both newly formed and existing LDCs.

Section 9 of this bill provides that this act shall take effect immediately and shall apply to any transaction occurring on or after the effective date of this act.

Prior legislative history

S. 7583 and A. 7510-A (Passed Assembly) of 2011-2012

Justification

As a rule, local governments lack specific statutory authority to create private entities. One exception to the rule is found in Section 1411 of the Not-For-Profit Corporation Law, which authorizes counties, cities, towns and villages to create LDCs. There are currently 279 known LDCs operating in the State. It is not clear how many of these LDCs were created for or at the behest of a local government.

With limited exceptions, the governing body of a county, city, town or village may determine that any real property owned by the municipality is no longer required for municipal use and authorize the sale or lease of the property to a LDC. The sale or lease may be made without appraisal, public notice, or public bidding, although the municipality is required to hold a public hearing at least 10 days before the sale

or lease is authorized. The LDC must use the property for the purposes set forth in its certificate of incorporation unless the LDC obtains written approval from the municipality to use the property for another purpose.

The primary purpose of this bill is to limit the use of LDCs, LLCs and other not-for-profit corporations by local governments by, among other things, expressly prohibiting the use of these private entities to finance a municipality's operations or the acquisition or improvement of an asset by or for the use of a municipality, with limited exceptions.

For those transactions that do not fall within the prohibition, the bill would help ensure that transactions between an LDC and a municipality are done in the best interests of the municipality, at "arm's length," and not to avoid statutory or constitutional restrictions applicable to municipal transactions. For example, the bill would provide that any contract between an LDC and a municipality provide for the municipality to receive fair and adequate consideration, malting clear that the constitutional gift prohibition in Article VIII, Section 1 of the State Constitution may not be contravened in the context of a municipal contract with an LDC.

Similarly, so that LDCs are not used as vehicles to avoid municipal procurement rules, the bill would provide that contracts between municipalities and LDCs are subject to the municipal contracting requirements of Article 5-A of the General Municipal Law. To facilitate periodic review and re-evaluation by municipal governing boards of leases and other contracts with LDCs, the bill would limit the term of such agreements to five years, subject to subsequent renewals, each up to five years, upon mutual consent of the parties.

In transactions involving the sale or lease of municipal real property to an LDC, the bill would provide for increased transparency by requiring the notice of public hearing to include the estimated fair market value of the property, the consideration to be received by the municipality, and a statement of the intended use. or disposition of the property by the LDC.

The amendments to the Local Finance Law in this bill would clarify that a guarantee or assumption of the debt of an LDC or other not-for-profit corporation, or a limited liability company, formed by, on behalf of, for the benefit of, or controlled by, a local government constitutes an unauthorized loan of credit by the local government. This would ensure that the dicta in the Summers case (60 AD3d 1271 (2009). Fourth Department) is not used as precedent to justify a local government's agreement to guarantee or assume the debt of such a private entity. In addition, these changes would make clear that the issuance of bonds and notes under the Local Finance Law is intended to be exclusive means for a local governments to finance over time their operations and the acquisition of or improvement of an asset for use by or for the local government, unless expressly and specifically otherwise provided for in a general or special law.

We are mindful that many LDCs have been determined by the Authorities Budget Office to be "local authorities" and, therefore, subject to requirements of the Public Authorities Accountability Act of 2005 (L.

2005, ch. 766 as amended by L. 2009, ch. 505, 506). However, the reforms in that Act did not address the concerns that would be addressed in this bill, such as the use of LDCs to finance municipal operations and assets.

The Comptroller urges the passage of this proposed legislation.

Budget implications

This bill has no significant fiscal impact.

Effective date

This bill would take effect immediately and shall apply to any transaction occurring on or after the effective date of this act.