New York State Change of Law Legislation Background

A. PROCUREMENT PROCESS

generally by Article 5-A of the General Municipal Law ("Article 5-A").

For example, Section 103 of Article 5-A. requires a local government to develop its own detailed terms and specifications for a project before it is put out for bid, limiting ingenuity of responses by prospective bidders. It prohibits significant negotiation of the terms of the contract with the successful bidder and makes cost the primary criterion for selection of the successful bidder. Where the project involves significant erection, construction, reconstruction or alteration of a building, Section 101 of Article 5-A requires the separate preparation of specifications and bidding of at least three subdivisions of the work, in addition to the balance of the construction project.

A community should have the opportunity to explore the willingness of proposers to accept differing levels of project risk necessary to achieve the project cost savings.

B. Requests for Proposals.

Use of the competitive "request for proposals" process as the vehicle for establishing public-private partnerships offers the necessary flexibility in developing the appropriate scope and details of the project. Responses to request for proposals provide an opportunity to identify new solutions, proprietary technologies, or a sharing of risks. Such a process can be open for public scrutiny. It has been used successfully in other areas of public procurement (e.g., Section 120-w of the General Municipal Law), by many state agencies in the procurement of services and in the private sector.

C. Long-Term Contracts.

Contracts for water and wastewater treatment services should not be limited to the current term of its legislative body or subject to the funds annually appropriated and available for contract payments. (See Section 109-b of the General Municipal Law.) Local governments currently have these powers for obtaining waste management facilities and services pursuant to Section 120-w of the General Municipal Law.

Although these conditions may be appropriate for the usual installment sales transactions, these limitations may substantially complicate the privatization transaction where the acquisition of substantial capital equipment and realty is contemplated. Because these transactions are typically proposed for and structured as a single transaction, requiring the separate bidding and treatment of funds applicable to the acquisition of equipment. machinery and other apparatus may add substantial cost and complication to the transaction.

Where the merits, and costs, of the transaction must be evaluated on the basis of the complex interrelationships among the goods and services to be provided over a term of ten to twenty years, the restrictions of Section 109-b may frustrate the use of public/private partnerships. There is New York legislative precedent for waiving these requirements where the value of the contract is based substantially on factors other than the cost of the goods to be acquired. See, e.g., Subdivision 9-103(7) of the Energy Law.

E. Restrictions of Disposition of Public Property.

The ability of local government to secure private investment and participation in water and wastewater infrastructure is also constrained by provisions of state law which require municipalities to determine that real property currently owned by such municipalities is no longer necessary for public use prior to any sale or lease to a private party. Generally, a sale or lease must be to the highest responsible bidder. See, e.g., County Law Section 215. It would be helpful to have legislation making it clear that a municipality could sell useful and functioning water supply and treatment facilities without having to declare them useless and excess.

REIMBURSEMENT TO GOVERNMENT OF COST OF PROCESS

The act or process by which a municipality privatizes its facilities need not be expensive to the municipality. The municipality need not bear the burden of the cost of a process which ultimately results in an opportunity for the private sector.

The private entity which is granted the rights by the municipality to own or operate the facility is willing to reimburse the municipality for the costs of the process under which the municipality selects and contracts with the private entity. Acceptance of such costs by the party ultimately benefiting is routinely practiced by commercial lenders requiring borrowers to pay for the costs of the loan transaction. Public entities currently recover the costs of a financing transaction as, for example, when the proceeds of a municipal debt issuance are used to finance the costs of issuing that debt. New York State development agencies pass their costs through to private developers as part of the costs imposed upon those private developers for municipal financing.

It is entirely appropriate for a municipality to expect to be reimbursed for its costs of undertaking efforts in privatizing its water supply and water treatment facilities. Notice of such intent should be included in the statement requesting proposals from private developers. The terms. therefore, should be described. Prospective proposers will then consider such cost recoupment as one of the many elements it considers in its proposal. This element of cost is normally a minimal element of cost to a proposer, one which will not affect the proposal of those experienced with privatization projects.

STATUTE OF LIMITATIONS

Generally, a proceeding to challenge actions of local governments or officers must be commenced within four months after the determination sought to be reviewed is final and binding (see Section 217 of the CPLR). In the context of a private financing for developing or renovating a water or wastewater facility, the risk of litigation challenging the contracting process may unnecessarily delay the financing or place an unnecessary litigation risk upon the financing transaction itself, affecting the cost of the transaction.

One solution to reduce this risk, without significantly adversely affecting the public's right to challenge improper governmental actions, would be to adopt a shortened statute of limitations that would apply only to the specific transaction being financed. The statute could provide that the underlying procurement and transaction must be challenged within sixty days after the award of the contract procured. The financing could be closed following that waiting period without risk that the whole transaction could be voided as a result of an error during the procurement process. There is New York precedent for this approach in Subdivision 120-w(6) of the General Municipal Law.

Similarly, the Local Finance Law which governs the issuance of debt by local government contains broad estoppel provisions which preclude challenges to the issuance of local government debt (other than challenges based on violations of the State Constitution) being commenced later than a brief interval following the publication of notices of the authorization of such debt assuming that applicable provisions of law have been substantially complied with and the municipality is borrowing for purposes for which it is permitted to expend money. See Sections 80-84 of the Local Finance Law.

STATE AUTHORIZING LEGISLATION

There is ample precedent in the State of New York for special legislation to permit municipal governments to utilize special procedures, such as those that would allow them to increase public-private partnerships. Such provisions are found, for example, at § 120-w of the General Municipal Law. relating to solid waste facilities and at § 9-103 relating to energy performance contracts.

State authorizing legislation would be permissive, that is, it should permit municipalities and governmental entities to enter into a wide variety of public-private partnership arrangements. It should authorize the sale of assets, the entry into long-term operating contracts and the other forms discussed herein.

The legislation should contain a recognition that the transfer of ownership of such facilities from governmental ownership to pnvate ownership is not a transaction which requires regulatory approval. Indeed, it should provide that the regulatory status of the municipal facility continues without change or modification when the asset is sold. the long-term contract is entered into or similar arrangements are made, assuming that the facility continues to serve the municipal purpose for which it was originally provided. This is supportive of the concept that municipal facilities providing municipal services should be treated in all regulatory contexts without regard to whether the asset or management of the asset was conducted by governmental or private entities.

The State authorizing legislation would specifically provide for the sale of such assets and for long-term contractual arrangements respecting the operations of such assets. The legislation should provide for one omnibus process under which a municipality could offer for sale such assets, could contract on a long-term basis for the operations of such assets, could contact for the construction of improvements and expansions, could provide for the financing of upgrading of such assets and could provide for all ancillary financing and other arrangements which would be necessary to support the total transaction. That process. we believe, should be an open and competitive process based on a solicitation of proposals by the municipality, a review of the proposals received taking into account all of the criteria for selection (including experience, professional competence, financing, and cost). The legislation should permit the municipality to provide such assurances to third party financing entities as is necessary for the proposer to achieve the financing necessary for the project.

 The legislation should provide that the municipality may recover as part of the selection process, all of its costs of entering into and completing the process.