Audit Finds Dozens of Inactive ESDC Subsidiaries
Authority Supporting Economic Development in New York State has Long-Dormant
Subsidiaries it is Not Even Aware of, Auditors Determine
Empire State Development Corporation (ESDC) has dozens of inactive subsidiaries – including some it was not aware of and others for which the authority has no files or records – that can and should be dissolved, according to an audit released today by State Comptroller Alan Hevesi.
The authority operates in partnership with the New York State Department of Economic Development to support a range of economic development projects around the state and to borrow money to build or improve facilities. Officials at the authority maintained that the continued existence of dormant subsidiaries presents no risk to the State because the subsidiaries are embedded in the operations of ESDC.
“It is hard to imagine a more disturbing symbol of New York’s shadow government than ESDC and its long list of inactive subsidiary authorities,” Hevesi said. “ESDC says that there is no risk to maintaining the subsidiaries, because they cannot function separately from the parent authority. But we see real risk: For example, ESDC could at any time create paid positions and make patronage appointments to any of the dormant subsidiaries.
“At best, this is an example of extremely poor business practices and careless management of State interests and resources. Recordkeeping is so bad that last year, ESDC’s Chairman actually called for the dissolution of four subsidiaries that the authority had already dissolved," Hevesi said.
Among ESDC’s more active and prominent subsidiaries are the Lower Manhattan Development Corporation, which is managing redevelopment of the World Trade Center site; the Harlem Community Development Corporation and the Governors Island Preservation and Education Corporation.
ESDC reported having 70 subsidiaries as of March 31, 2004, but auditors identified 202 subsidiaries legally in existence, including 98 that were either clearly inactive or appeared to be inactive. While auditors found that ESDC did have a process in place to control the creation of new subsidiaries, they saw a need for significant improvements in the way that the authority maintains records for and controls over existing subsidiaries. Auditors noted that ESDC has no process to track subsidiaries to determine those that are inactive and take the necessary steps to dissolve them.
For example, the Governors Island Redevelopment Corporation (GIRC) was created in 2000 to facilitate the development of the island in New York harbor that was soon to be transferred from federal to State ownership. Two years later, ESDC decided that its efforts relating to Governors Island should be refocused and the Governors Island Preservation and Education Corporation was created. ESDC’s board of directors passed a resolution in 2002 to dissolve GIRC, but auditors found that three years later, GIRC had not been dissolved.
Recordkeeping regarding ESDC subsidiaries is so poor that, in some cases, auditors found records for subsidiaries that ESDC officials did not know existed. Auditors also reported that ESDC officials told them that certain entities were not subsidiaries, but then the auditors located certificates of incorporation that indicated that the entities were, in fact, ESDC subsidiaries.
A 2005 ESDC press release issued after the audit commenced stated that subsidiaries should be dissolved when their work is completed, and said that the authority was going to dissolve 20 inactive and unneeded subsidiaries. Auditors noted that four of the subsidiaries named in the press release – Sea Park West Houses, Inc.; Wright Manor Phase I Corp.; Wright Manor Phase II Corp.; and Times Square Subway Improvement Coalition – had already been dissolved. ESDC has since taken all necessary steps to dissolve the remaining 16 subsidiaries, but indicated that it is waiting for action by the State Department of State to complete the dissolution process.
Auditors reviewed corporation registration records at the Department of State, and found that some older and less active ESDC subsidiaries had been dissolved “by proclamation,” an administrative procedure. ESDC officials were not aware that these subsidiaries had been dissolved. While it is not clear that ESDC subsidiaries can be legally dissolved in this manner, auditors noted that it was not clear to officials at the Departments of State and Taxation and Finance that the entities were ESDC subsidiaries.
ESDC was established in 1995 as an umbrella organization for three authorities established in the 1960s: the Urban Development Corporation (UDC), the Job Development Authority (JDA) and the now-defunct Science and Technology Foundation. UDC issues bonds for capital costs relating to the acquisition, construction, rehabilitation and improvement of commercial, industrial, manufacturing, educational, recreational and cultural facilities. JDA makes loans to companies to expand facilities, build new plants and acquire machinery and equipment. ESDC and its subsidiaries have a total of $6.7 billion in outstanding bonds as of December 31, 2005.
In its written response to the audit, ESDC maintained that the findings were based on “a lack of understanding of subsidiary operations.” The response also noted that “it is impossible, given the number of years that have elapsed, the relocation of staff, and the physical consolidation of certain subsidiaries…for present staff to have complete records on all subsidiaries.” The complete response is included in the audit.
Click here for a copy of the audit.
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