The 63-20 Corporations: Public Private Partnerships. Beware of the Fine Print

The 63-20 Corporations: Public Private Partnerships.
Beware of the Fine Print

In the future, South Windsor residents can expect to hear more about 63-20 corporations. A 63-20 is a public-private partnership established for the purpose of infrastructure development. In general, these are non-stock issuing corporations that are formed under the nonprofit corporation act of the State. A majority of the Town Council can authorize formation of this type of corporation and the Council can restrict its purposes. As you may hear by some, how important and useful this financial tool is, it is important for us to understand this in more detail to evaluate the risks and benefits intelligently.

Here are few of the many concerns that I have about these that I want to share

A.    Bypassing the priorities of the people:

In our town, we have asked the critical questions from the general public in referendums, which have provided us the direction, wisdom and the vision from the people. The 63-20 Corporations may serve as legal vehicles to bypass the will of the people and then have the public be obligated to pay via tax dollars. This process can lead to a slippery slope. 

B.    Governance and Oversight:

Once formed, the 63-20 corporation is no longer subject to the governance of the elected body. Thus, the new entity can enter into agreements with third parties. This can result in the corporation to accrue public and private debt.

C.     An Unfair Advantage:

A public-private partnership may result in joint ownership of real estate or a facility, providing the private partner gets access to public capital and/or a significant reduction in their tax liability. Because of its advantages, this type of corporation is extremely attractive to private investors. You will see that the private investors and loaning agencies or their proxies may be the most passionate proponents of such projects.
The private partners, landowners and developers usually get paid upfront and the public benefits and actual potential opportunities if they exist are much long term.

D.    Disadvantages to the Town:

Any new entity created under the 63-20 incorporation is not owned by the town. The town may offer some governance recommendations. For example, if a facility is built under this legal agreement, town control over the design; operation and maintenance of any facility would be reduced.  Additionally, the town will have to depend on their performance for economic return on investment. Moreover the transparency that is expected of town projects and equal opportunities may not be a part of the operations of the entity. The town also may have to deal with an unknown and yet unproven private partner.

E.     Exit Strategy Risks:

In certain cases, the private party can sell the project/facility to a third party. If the project is not financially viable, the town could remain liable for the project expense.  The inherent risks of this type of partnership include a lack of exit strategy in the event of bankruptcy or other failure.

F.     Accounting:

The bookkeeping of these types of entities may be referred to as “off-book financing’ by some. This is a form of accounting in which the partnership has assets, debts and cash flow separate from other town finances. Enron is an example of a corporation - with its subsidiaries - that was able to use “off- book financing” to remain “under the radar.”   The use of line items can give a false sense of security to Councilors who may be unaware of its relationship with other partnerships. The credit-rating agencies have become increasingly attentive to and critical of this phenomenon and such practices can negatively impact the town’s ratings.

G.    Favoring Some at the Expense of Others:

A 63-20 corporation has been proposed for the South Windsor Rec-Rink project. Various professionals have suggested that this project was not financially viable. Over 40 town businesses have expressed their objection to the unfair financing of such project.  The use of Town’s credit status and a suggested the tax exemption to support the Rec-Rink type projects could drive other businesses from South Windsor. The Town needs to be extremely cautious when proposing the use of public monies for private enterprises. The actual tax paying businesses when hurt would reduce their capacity to meaningfully continue to pay taxes.

Conclusion:

I recognize that the 63-20 financing tool is being used for community projects in various parts of the country. Highway systems have benefited from this arrangement. Other applications have demonstrated some of the challenges of this partnership. It should be used with extreme care. Before our tax dollars are used in this way, it is important that residents understand the ramifications and future impact it could have on the tax structure.  If projects of a certain magnitude are considered, I suggest that these be brought to referendum, so the people who ultimately will pay the bill can make the choice. I also think that depending on the actual anticipated cost of the project; in some of these cases the private investors should pay for the referendum as part of their investment.

Dr. Saud Anwar is a South Windsor Town Councilor.