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FOR RELEASE: Immediate, Wednesday, March 9, 2005

Gridley Testifies Before Senate on Public Authority Reform

ALBANY, N.Y. -- Dormitory Authority Executive Director Maryanne Gridley testified today before the State Senate Standing Committee on Corporations, Authorities and Commissions on public authority reform.

The hearing, titled “Reforming New York’s Public Authorities: Providing Improved Transparency, Accountability, Efficiency and Oversight to Meet the Challenges of the 21st Century,” was held in Hearing Room B of the Legislative Office Building.

The following is Ms. Gridley’s testimony:

Good morning. I am Maryanne Gridley, and I have been Executive Director of the Dormitory Authority of the State of New York since 2002. With me today are Michael Corrigan, the Authority’s Deputy Executive Director, and Jeffrey Pohl, our General Counsel.

The Dormitory Authority was established in 1944 to finance and build dormitories at New York State Teachers’ Colleges for World War II veterans going to college on the G.I. bill. Those Teachers’ Colleges were the forerunner of the State University of New York. The Authority grew as Governors and Legislatures saw a greater need for financing and construction expertise in the public and private higher education and health care sectors.

Early in his administration, Governor Pataki asked the Legislature to merge the Facilities Development Corporation and the Medical Care Facilities Finance Agency into the Dormitory Authority. That merger took effect on September 1, 1995. Under the consolidation, higher education and health care institutions now have one-stop shopping for tax-exempt financing and construction project management services.

Today we are the State’s principal health and education finance and construction agency, providing financing and construction services to both private not-for-profit corporations and governmental entities. Of the $31.2 billion in outstanding Authority debt, approximately $15.0 billion was issued for private health care, higher education and other not-for-profits, and $16.2 billion for our government clients, which include SUNY, CUNY and municipalities as well as the State of New York. The Dormitory Authority is consistently one of the top five issuers in the country of municipal bonds.

During fiscal 2004, we supervised $889 million in construction work, with a pipeline of $5.12 billion for projects in planning, design or construction. As of January 31st of this year, we expended nearly $906 million on construction projects under our supervision, and expect to hit the $1 billion mark by the end of March.

Similarly, we sold $6 billion in bonds during fiscal 2003-04, and $3.88 billion so far this year. We also help our clients lease high-tech equipment at tax-exempt rates; last year, our clients leased $150 million in diagnostic, communications and other equipment; and so far this year clients leased $155 million.

These are impressive numbers. To highlight the valuable services our Authority brought to the citizens of New York, I have included in the attachments to my testimony the main Dormitory Authority accomplishments from 1998-2005. A few quick examples of our results during the past year are:

If you look at the past seven years, we have also undertaken bond refundings that have provided nearly $765 million in present-value savings to the State budget.

In the past two years, we have raised our goals for minority- and women-owned businesses to participate in our programs. And we have met our new goals, which, summarized on a statewide basis, are now 13 percent minority business participation, and 7 percent for women. In the last fiscal year, we achieved 14 percent and 10 percent, respectively.

We also completed a software integration project to make sure that our financial systems and our construction project reporting systems share information. We have more than 425 projects in this new database, without duplicate data entry, and our clients have exclusive Internet access to this spending information and project progress reporting.

During Governor Pataki’s administration, the Dormitory Authority has made extensive changes to improve ethical standards, the quality and transparency of our services, our reporting and accounting of our activities to our clients and outside agencies, and our efficiency and effectiveness. I’d like to outline these initiatives for you now.

First and foremost, we rely on our experienced staff of more than 625 employees. Many Dormitory Authority employees have been with us for most of their careers. We have a turnover rate of less than 5½ percent.

The Authority has established an ethics and integrity program. All new employees are given our code of conduct, and trained in its principles: Promote fair, open and ethical business relationships. Maintain appropriate confidentiality. Make sure your actions will stand up to scrutiny. We explain conflicts of interest and how to avoid them. We tell our employees the rules on gifts, honoraria, outside employment, nepotism, political activity and post-employment restrictions. And we provide extensive training on Governor Pataki’s Executive Order 127 regarding procurement lobbying, as well as in internal controls.

Initial training isn’t enough. Refresher training is required for everyone. Our Ethics Officer advises employees and helps enforce financial disclosure requirements for our policy-making employees.

We share our code of conduct with our business partners – contactors, bankers, bond counsel, consultants and vendors. And we give them our Code of Business Ethics to make sure they know the high standards we expect from them. Our contracts provide that a breach of the Code is grounds for termination.

In addition to our Ethics Officer, we have:

And finally, we have an Office of Internal Affairs. Our Director of Internal Affairs reports directly to our Board Chair and me, and meets with the full Board annually, with updates as required. He works closely with management to investigate employee and vendor misconduct, fraud and abuse when necessary, and develops evidence with law enforcement agencies to ensure that people who steal, cheat and commit other crimes on our projects are prosecuted to the fullest extent of the law.

Our Director is a certified fraud examiner and a former Deputy State Inspector General. His staff of seven people consists largely of retired law enforcement officers, as well as investigative auditors and analysts. They operate a toll-free confidential hotline for tips on fraud, waste, abuse or other wrongdoing. Posters with the hotline number are displayed prominently in our main offices and at all construction field sites. Internal Affairs investigators make several hundred unannounced visits to our construction sites and also attend construction kick-off meetings to explain the rules and consequences of non-compliance to all parties involved in the project.

In addition to reporting to our Board, the results of their investigations – including arrests and convictions – are communicated to employees through Internal Affairs’ ongoing ethics training program. Our message is simple and clear to our employees and vendors: Obey the law. If you don’t, we have people who will discover you. And we will prosecute.

Our Internal Affairs Director also trains our construction and procurement staff in fraud detection and awareness. His integrity program training has been well received; he also has provided training to other State agencies and professional organizations at their request. Our Corporate Integrity Program is also on our website, where our publications can be ordered. We believe strongly in the need to actively investigate and seek out wrongdoing. It is, at times, a painful process, but essential for maintaining our public trust. We also use Internal Affairs to facilitate cooperation of any investigations by U.S. Attorneys, the State Inspector General, the Attorney General, and district attorneys.

In our discussions with the Millstein Public Authority Governance Advisory Committee last year, we found that we were already in compliance with most of their recommendations. At the time, we did not have a separate Audit Committee for our Board. Last June, an Audit Committee was established. We are now implementing a review by our independent auditors of our internal controls over financial reporting. In 2000, the Board had directed the Authority to engage a forensic auditor to review the Authority’s internal procedures and processes for weaknesses, and required that similar reviews be undertaken every three years. We expect to bring to our Board at its next meeting a resolution for a new forensic review.

Our Annual Report, which contains the Authority’s financial statements, has been available on-line for several years. This year, we also published the financial statements in a format accessible to people with disabilities, as advised by the Office for Technology.

In addition to setting and enforcing standards, I also believe strongly that we have a responsibility to communicate to the public about our activities. And we do.

Our Board meets 10 times a year, and we follow the Open Meetings Law to notify the public. Our Board consists of 11 members. With the advice and consent of the Senate, the Governor appoints the Chair and four others to three-year terms. The top State officials in our major program areas are on our Board: the State Education Commissioner, State Health Commissioner, and State Budget Director, who each send representatives to vote. The State Comptroller, Senate Majority Leader and Assembly Speaker each have appointments to our Board, and we assume they report back to these elected officials on Board decisions. New Board Members are provided with orientation and training to familiarize them with their responsibilities, as well as our policies and practices. I am proud that we have a very active, intelligent and inquisitive Board, and our meetings often include quite a bit of debate and discussion.

Our monthly Board agenda contains presentations to the Board to outline bond issues for their review and approval. I have attached the agenda from last week’s Board meeting for your information. In addition, our Executive Staff submits written reports to the Board. We inform them of new issues and initiatives and update them on topics as they have requested, such as the status of pending financings, updates on environmental reviews of our projects, and extensive financial reporting. We update them on construction projects, including changes in schedules and budgets; pending legislation; and the financial condition of clients on our watch list. Senior Staff of the Authority all recognize that they are accountable to the Board, which must be kept up to date on matters that raise policy or other significant issues in relation to the Authority’s operations.

I have attached a summary of the Board’s actions since January 1, 1995. You will see, for example, that the Board approves our procurement report and guidelines annually. The Board adopts the financial statements, approves the annual investment report and its guidelines, and approves the annual bond sale report.

We communicate regularly with our not-for-profits, and we meet monthly with our clients in our larger construction programs, such as SUNY, CUNY, HHC, the Office of Chief Medical Examiner for New York City, the State Department of Mental Hygiene and the Department of Health.

And we operate a Customer Satisfaction Program, with individual personal interviews with our clients after each bond sale, after the design phase of every construction project, and after project completion. Their feedback is candid and confidential regarding our staff assistance, communication, responsiveness, quality and timeliness, their costs, our fees and our value. We analyze their comments and have instituted improvements in client communication and project reporting based in part on customer comments.

Our independent auditors report in person to our Board every June, in an executive session limited just to the Members. The auditors will also meet with the new Audit Committee.

We maintain a website that includes information on each outstanding bond issue, on bid opportunities, our construction projects, our financing guidelines, bond monitoring programs, and information for our clients, consultants and contractors. We include information to help minority businesses find out who’s won a prime contract, so they can seek subcontracting work. We seek feedback from our customers, vendors and staff for improvements to the site. Just last year, our Office of Construction revamped their entire section to better meet the needs of our clients and contractors.

Our new municipal market disclosure service kicks off this month. Our consultant, Digital Assurance Certification (or DAC), chosen after a competitive process, will help the Authority and its clients fulfill their continuing disclosure responsibilities as required by the Securities and Exchange Commission. DAC will make this and other information available to the investors and other members of the public on the Internet. This site will enable investors to readily review updated financial information about our clients and other information relating to the outstanding bonds. Investors and the public will be able to search the DAC website by name of the bond issue or borrower, giving them an information tool that we believe will help the Authority and its clients receive better market reception and, ultimately, better rates, while meeting our responsibilities under federal securities law.

With many of our staff in construction field offices throughout the State, we created a web-based Intranet to ensure that information is spread not just within one office, but throughout the Authority. Department operating procedures, transaction forms and documents are posted on the Intranet to ensure staff always has access to the most up-to-date information. Our weekly senior staff meetings and monthly technology meetings are summarized on the Intranet. Employees use our internal web to apply for training seminars, submit expense reports, report their work hours, change their tax withholding, and receive their pay statements and W-2 forms. We automate as many routine tasks as we can. We also allow updates on our charitable efforts through the voluntary Adopt-a-Family Drive and State Employees Federated Appeal, new hires and retirements, and other lighter events.

We answer more than 350 requests a year under the Freedom of Information Law, and many more inquiries from the public through our investor information hotline and our Communications and Marketing Unit.

We also submit many reports to outside and oversight agencies, including the State Comptroller and the Legislature. We issue 70 different reports during the course of the year to our Board, the legislative fiscal committees, the Governor, the Comptroller, the Director of the Budget and the Commissioners of Education and Health.

Finally, we are subject to audit by the State Comptroller, and, in some programs, the Comptroller’s approval of the terms and conditions of the public sale of our bonds.

Public concern has been raised about the accountability, purposes and necessity of public authority borrowings. It is important that the public realize that the Legislature and Governor approve every financing we do on behalf of New York State, through the budget process. They are all in the enacted budget, and we could not proceed without that authorization. We, and the public, must assume that legislative passage of the budget indicates a positive endorsement of the type of debt issuances authorized.

All bond issues, whether for a State entity or for a not-for-profit hospital or college, are subject to the State Environmental Quality Review Act. By law, we are authorized to be a lead agency in performing the SEQRA review and generally act in that capacity unless an interested local municipality seeks to fill that role. When acting as lead agency, the Authority notifies other interested and involved agencies and seeks public input if project issues are identified, even if a public hearing is not required under SEQRA. We report monthly to our Board on SEQRA issues. We also conduct a public hearing required by the Tax Equity and Fiscal Responsibility Act of 1982, regarding the project’s qualifications for tax-exempt bonding status. And, of course, we comply with the IRS regulations and SEC Commission requirements.

As part of their responsibilities, our clients must comply with local zoning laws or seek variances for their projects. Compliance with local zoning is one of the issues considered in the SEQRA review process.

Our Board must approve all bond issuances, typically in a two-step process, and the Public Authorities Control Board also must approve them.

Our private-sector health care issues have been reviewed extensively and publicly through the Health Department’s Certificate of Need process. The State Hospital Review and Planning Counsel makes recommendations to the Health Commissioner on eligible construction projects. The State Public Health Council must approve all new providers in the State. These projects are thoroughly vetted for community need, the ability of the institution to afford the project, programmatic review and public input.

And, as you’ve all read in press accounts during the past six months, the State, through legislation and the enacted budget, has authorized us to finance executive and legislative grant programs for local economic development, education, high-tech capital projects, child care and other programs.

Another important aspect of our operations is our portfolio-monitoring program. Our investors place their trust in us with every purchase of a Dormitory Authority bond. We owe it to our investors to do our best to avoid a default on their investments. And, in our 61 years, we have never defaulted on our bonds.

We take some pride in the fact that we are not merely a conduit financing issuer, as you are likely to find with a local industrial development authority (IDA). First, our Board has adopted financing guidelines that set forth rating and security criteria for Dormitory Authority bond issues. For each financing, Authority staff makes a detailed presentation to the Board about the financing’s salient features.

Also, once we make a loan to a client, we have an Office separate from our financing staff to monitor the financial condition of our clients during the life of their bonds. We provide value-added services to the State, our insurers and our clients. We watch mortgage payments and cash flows on a yearly, quarterly and sometimes weekly basis so we can work with other government agencies and the college, hospital or nursing home management to identify and address financial problems early and effectively. This early warning system detects institutions in financial difficulty. We provide a nexus for all stakeholders to participate in helping these clients. At times, we meet with clients’ Boards to discuss their fiscal health, strategic objectives and business plans.

Together with DOH, we may provide clients with assistance through funds designated by the Health Care Reform Act’s Health Care Restructuring Pool Program. This program provides loans to fund activities at hospitals and nursing homes. About $144 million in such loans have been administered since 1997.

The value that the Dormitory Authority brings is consistent, real-time assistance in aiding new business plan reconfigurations and operational assistance, as well as ensuring continued access to the capital markets.

We acknowledge that both houses of the Legislature are concerned about the number of public authorities overall. As you deliberate reform proposals, I would ask you to reconsider the authorization first made in 1997 to allow IDAs to issue bonds for health care institutions and college dormitories.

Right now, IDAs and the Dormitory Authority are each empowered to finance health care and dormitory projects worth less than $20 million. But the IDAs are held to a lower standard of accountability to the State, even though they are creations of the State.

We are mandated to bring all our financings to the Public Authorities Control Board. An IDA, with its local board, is not.

We are audited independently and by the State Comptroller. The last IDA audit by the Comptroller was issued in 1999.

We have never had a bond default. Some IDA issues have defaulted, which can lower investor confidence for similar future projects.

Because of our asset-monitoring function, we are able to make interested partries at the state level aware of possible problems well before they reach the default precipice.

At a time when we grow increasingly concerned about overlapping layers of government, and about the proliferation of public authorities and their accountability, I offer the opinion that neither health care nor dormitory projects are the primary mission of an IDA. The Dormitory Authority is in the best position to help the health care and higher education industries continue to have access to the capital markets. We are New York's only health care debt financing agency providing routine oversight and reporting, so that State government leaders, credit rating agencies, investors and the public have the necessary information and oversight of debt issuance. Our new Internet disclosure initiative is an example of this commitment.

We support the intent and most of the content in Senate bill S1135. I am proud to report to you that the Dormitory Authority already conforms to many of the reforms proposed in your bill. We do have technical concerns regarding actual bill language, and we ask that you allow us to raise our concerns in a follow-up meeting with your staffs.

There are a few areas, however, that I would like to speak to and ask that you consider some additional factors.

We read the Senate bill to require public authorities with outstanding debt of $50 million or more to submit a five-year capital plan. In that regard, we have a portfolio of $31.2 billion, with an annual construction program of close to $1 billion. But we are not the originators of a capital plan; our clients are. State clients, such as SUNY and CUNY, have five-year capital plans that are approved by the Legislature. Our biggest municipal client, the New York City Health and Hospitals Corporation, has a one-year capital plan approved by the City Council. Our private-sector clients are not required to have outside approval of their capital plans. We are hard-pressed to determine how we could create such a plan.

Similarly, you would require public hearings to be held on any building construction project of $5 million or more. Our projects are already reviewed by the localities, and our health care projects undergo the extensive Certificate of Need process. By the time projects get to us, their public benefit has already been determined. We are unsure what value an additional hearing would bring.

We have concerns with the costs of certain other legislative proposals, such as an independent budget office and inspector general to be funded by the public authorities. These proposals have fiscal implications. Our clients already pay thousands of dollars in legislatively imposed fees, including the bond issuance charge, an annual cost recovery fee and a Department of Health fee charged to health-care clients. We have no way of funding these proposals without raising our own fees. Our clients would pay – hospitals, nursing homes, colleges, universities, municipalities, libraries and organizations that aid the developmentally disabled. Alternatively, many of them may choose to finance through an IDA, where there is minimal State oversight or accountability. Why impose a hidden tax as we consider accountability and transparency?

Further, State agencies constitute over half our bond portfolio. So taxpayers would indeed be paying for these additional mandates every time bonds are financed or refunded.

This proposal has further fiscal and programmatic implications. I would expect that an independent officer or the Comptroller would need substantial qualified staff as an ongoing expense. If such funding – either as direct appropriations from the State or as assessments on public authorities – was not sufficiently made available, a logjam of contracts in our construction area would result. The Dormitory Authority recognizes the vital importance of cash flow to the construction industry. Our staff awards contracts efficiently and effectively, including extensive due diligence by our Construction and Procurement units regarding contractors’ financial viability and performance record.

Ten years ago, the Facilities Development Corporation was merged into the Dormitory Authority. The FDC’s contracts were subject to the Comptroller’s approval. The delays in contract and change order awards were notorious, and more than a few contractors went bankrupt, blaming State bureaucracy. They weren’t wrong.

Just a few years ago, the Legislature approved removing Mental Hygiene construction contracts from OSC purview and gave that responsibility to the Dormitory Authority. None of the Dormitory Authority’s contracts before or since were subject to OSC review. All our construction programs operate under the same successful business model. We comply with Executive Order 127, and would submit that our procurement procedures are more than adequate to protect the public’s interest.

I will point out that the Dormitory Authority already provides many of the new reporting requirements envisioned in this bill, to the Comptroller in his annual Public Authorities Data requests. Much of what we submit is not posted on the Comptroller’s Website, but there’s no reason for it not to be. By requiring additional distribution such as procurement guidelines and debt issuance reports, would the State be reforming public authorities, or adding regulations and duplicate reporting?

Lastly, we believe a Commission on Public Authority reform, which parallels the Senate’s concern for meaningful reform and improved accountability, is the best first step. Until a thorough review of all entities under the nomenclature of public authorities is conducted, we cannot know what is functioning and what is not. And the bulk of these entities, 425, are local, often special-purpose, authorities.

Of the 169 State authorities and State subsidiaries, I hope you will hear today that the largest statewide authorities have many of the same practices, procedures and reporting that we at the Dormitory Authority perform.

With differences in State and local special-purpose missions, such as operating transportation systems versus conduit financing activities, I think you will find that one shoe size does not fit all. We agree that universal standards for accountability should be promulgated for all. And we will be happy to add our thoughts to your dialogue.

I thank you for inviting me to testify today; I will answer the Committee’s questions.

For more information, contact Press Officer Claudia Hutton at (518) 257 3382, or CHutton@dasny.org.


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