Brief Review

Shadow Government: The Hidden World of Public Authorities and How They Control Over $1 Trillion of Your Money, by Donald Axelrod, New York: John Wiley & Sons, 333 pages, $24.95.

In 1988 the Kansas City Star reported that $8 million in tax-exempt stadium authority bonds had provided the seed for lucrative contracts awarded to firms that had made big contributions to the campaigns of local public officials. A recent New York Times article on the New York Port Authority revealed lavish spending, including $35,000 annual luncheons for bond underwriters and a jet helicopter staffed by five pilots, in a time of budget austerity for the rest of us.

Donald Axelrod's book helps explain why autonomous public authorities are especially susceptible to such shenanigans. Axelrod concerns himself with the development of the 35,000 or so quasi-governmental units that have sprung up in the last century on the regional, state, and local level. These authorities are charged with managing such projects as transit, roads, tunnels, bridges, airports, stadiums, racetracks, low-income housing, sewage treatment, and economic development. Until recently, Axelrod notes, no one had much bothered to keep track of all the public authorities/special districts/government corporations that were popping into existence. In fact, a more exact count of authorities won't come until the 1994 census.

Some authorities levy general taxes; most collect tolls or fees; all of them borrow. The borrowed funds are repaid with a combination of dedicated fees, taxes, or a promise to appropriate funds for the debt service. It is the rapacious demand for borrowed funds, in the form of bond issues, that troubles Axelrod the most. At best, he argues, the borrowing lets an insulated bureaucracy treat itself to one continuous party while providing a needed service. At worst, the flurry of bonds represents a betrayal of the citizens the authorities are created to serve.

Axelrod credits New York Gov. Nelson Rockefeller with bringing the public authority into vogue during his 15 years in office. Rockefeller created 23 authorities, including the Mental Health Facilities Construction Fund and the Housing Finance Agency. By the 1960s, officials everywhere realized the potential of such authorities. At the time authorities had two big advantages: 1) They forestalled unpopular tax hikes while delivering popular services, and 2) the federal government didn't tax the bond interest, guaranteeing a steady stream of willing investors.

The relative ease with which an authority could be created allowed government to expand into new roles. Axelrod notes that in the '60s authorities took on "social objectives" such as health and housing, and in recent years they have tackled environmental projects such as waste treatment. A former New York state budget officer, Axelrod has little quarrel with using government to do great things. It's when authorities mask the doings of government that he thinks they go astray.

One great advantage of using quasi-governmental units to issue debt is that it sidesteps any constitutional or statutory requirements to get voter approval for state bond issues. (According to numerous court rulings, debt incurred by special-purpose districts or authorities is not official state debt.) Axelrod notes that California localities found ways around Proposition 13 by using special district fees for water, sewer, and schools to replace property taxes, an instructive demonstration of the fungibility of government levies. Although Axelrod considers constitutional limits "fiscal straitjackets," he does not condone breaking them on the sly.

Axelrod admits that voters often favor user fees over broad taxes because there seems to be a direct relationship between what you pay and what you get. But he says voters fail to consider the waste and mismanagement that can flourish in institutions that do not have the same public-disclosure requirements as "real" government units. He cites a 1983 criminal examination of state authorities by the New Jersey State Commission of Investigation that led to indictments and a massive overhaul of the system. And a brief rundown of several states' "economic development" efforts reveals that public-authority money commonly flows to the politically connected without taxpayers' knowledge.

Axelrod's solution is for officials to avoid the flim-flam by directly using the state to run trains, build hospitals, or bury waste. Failing that, he'd like to see authorities subject to tougher "sunshine laws" and more rigorous oversight. But nowhere does Axelrod consider privatization as a serious alternative to these mutant creations and their attendant problems, despite detailed proposals for privatizing ports, airports, and other currently public projects. With private ownership and market discipline, the oversight problem disappears, and taxpayers no longer have to worry about whimsical spending of their money.