One often wonders what problems an unexpected piece of legislation is designed to address – especially when something as broad as the new 159-154 (found in Section 5(a) of Session Law 2023-138) sweeps into town. This legislation now requires Local Government Commission approval before a unit of local government enters into a contract that cedes “control” over a public enterprise. Our concern is that the legislation’s definition of “control” will cover many arrangements that local governments might not see as ceding control, and certainly not as needing LGC review.
In the legislation, “control” includes the following:
- “Responsibility for operation and maintenance of a material portion of the assets and facilities of the public enterprise.”
- “The authority to manage a material portion of the staff responsible for operation and maintenance of the assets and facilities of the public enterprise.”
Many local governments will have management contracts for systems and facilities that transfer this level of “control.” Does a private company run your airport for you? Manage your wastewater treatment plan? Or maybe your golf course or baseball complex?
There are grey areas as to what it means to be “responsible” for an activity or what is a “material portion.” But undoubtedly there are many contracts out there whereby a private company takes on significant management responsibilities for a substantial portion of a public enterprise.
For many years bond counsel have reviewed management contracts for financed facilities against IRS “safe harbor” rules for those contracts. This new State legislation requires LGC approval for many contracts that would fit within the IRS safe harbor rules. For example, the private party’s compensation structure is an important part of the IRS analysis. There’s no provision in the State legislation, however, that takes the private party compensation into account in determining whether a contract needs approval (apart from an exemption for contracts for “specified maintenance services” on a fixed fee or fee per service basis).
Also, in our view the LGC approval requirement probably applies when you renew an existing agreement. After all, the renewal of an agreement is “entering into an agreement” and there’s no provision in the legislation that grandfather’s-in existing agreements.
The new legislation requires the local government to conduct a public hearing, but that’s not terribly burdensome. There’s no reason to think the LGC will start to take a dim view of private operating contracts, but it’s just one more hoop to jump through (and one more thing the overwhelmed LGC staff will have to try to administer).
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