The What and Why of Municipal Authorities

8.1.02 Guide to Municipal Authorities

I. What and Why of Authorities

Emergence of Authorities

Authorities (also known as special districts in other states) are governmental bodies created to finance and/or operate specific public works projects without tapping the general taxing powers of the municipality. Initially this was done through a device known as the revenue bond where revenues generated from users of the project pledged to operate it, maintain it and make the payments of principal and interest on the debt incurred to build it. The first modern attempt at revenue bond financing in this country appeared in Spokane, Washington in 1895. There was a second attempt in Chicago in 1898. During the period from 1910 to 1925, municipal revenue bonds became an established method of financing in the United States. By 1932, water revenue bonds had been issued by municipalities in about 10 states.

The revenue bond mechanism was next extended to special-purpose public entities. The Port of London, organized in 1909, was the first authority to be known by this name. The name authority was said to have been given by a newspaper editor as a reaction against the many ‘authorities’ granted to it by Parliament. The Port of New Orleans, organized in 1896, was the first modern-type authority in the United States, although it did not carry the name authority in its corporate title. The Port of New York Authority has the distinction of being the first American institution to use this term. Formed jointly by the states of New Jersey and New York, it resolved long-standing disputes over the control of maritime traffic in the Hudson River and New York Harbor. Organized in 1921, its financial success, following a shaky start, has done much to encourage authority creation in other areas.

Municipal authorities in Pennsylvania, as in many other states, had their beginning in the Depression of the 1930’s. As part of its fiscal recovery policy, the federal government granted money to states and municipalities for public works construction to stimulate employment and provide needed public facilities. These grants had to be matched by the recipient unit, but many states and localities were unable to pay their shares, due both to reduced revenues and restrictive debt limits. A number of states, including Pennsylvania, then created state authorities to borrow outside constitutional debt limits by making use of revenue bonds. Pennsylvania was one of three states that passed general enabling legislation to allow their municipalities to create authorities. This was the Municipalities Authorities Act of 1935.

The 1935 Act was repealed and replaced in 1945 by the present Municipality Authorities Act giving greater flexibility in operation and in the type of bonds issued. The text of the Act is printed at the end of this book. It retains the same principles. The project must be in the proprietary fields of government, must have a public interest and must be self-sustaining. The requirements of public interest and self-sustaining nature are basic in understanding authority operations.

Approximately 200 municipal authorities were organized under these acts prior to 1951. In 1951, the way was cleared for leaseback authorities by a decision of the Pennsylvania Supreme Court upholding the right of municipalities to sign long-term leases with authorities.1 This additional flexibility allowed authorities to borrow on the pledge of rentals made by the municipality over the term of the bond issue. The municipality would operate the project with its own employees and use the revenues collected to make the lease rental payments to the authority.

The number of authorities formed annually peaked in the 1950’s, but activity in the amount of bonds issued annually did not reach a peak until 1986. In the 1940’s borrowings were heaviest for water authorities, in the 1950’s and 1960’s for school authorities and since 1975 for hospital authorities. Issuance of sewer debt has been important since 1950, but it was the largest category only in 1974 and 1986.

Character of the Authority

The municipal authority in Pennsylvania is an alternate vehicle for accomplishing public purposes rather than through direct action of counties, municipalities and school districts. The Municipality Authorities Act of 1945 describes an authority as “a body corporate and politic” authorized to acquire, construct, finance, improve, maintain and operate projects, provide financing for insurance reserves, make loans, and to borrow money and issue bonds to finance them.2

Although local government plays a role in creation of an authority and appoints the members of its board, the authority is not part of the municipal government. An authority is not the creature, agent or representative of the municipality, but is an independent agency of the Commonwealth.3 It is a public corporation engaged in the administration of civil government. An authority is a separate legal entity with power to incur debt, own property and finance its activities by means of user charges or lease rentals. An authority can be a financing agent for a capital project, an operating entity or both. Authorities finance a significant share of local capital improvements.

Reasons for Creating Authorities

Financial Reasons. Pennsylvania local governments were faced with unrealistic debt limits based on real estate values before the implementation of reforms mandated by constitutional amendment in 1972. The Local Government Unit Debt Act now sets limits based on average total revenues of the local government. Self-liquidating debt funded entirely from project revenues can be excluded from the municipality’s debt limit. This change, plus the inclusion of outstanding lease rental obligations owed to authorities in the overall determination of debt limits has removed any advantage accruing to the authority method of borrowing because of debt limit considerations. However, the previous debt limitations gave rise to many authorities now in existence.

Another financial consideration is the desire to avoid local tax increases. Authorities do this by resorting to user charges. User charges can result in a more equitable distribution of the burden of government by shifting costs to actual consumers with payments based on the level of service consumed. Municipalities can and do impose user charges, but authorities must employ this method since it is their only revenue source. It is easier for an authority to impose user charges because of its relative freedom from political pressure. Also, people may accept authority user charges more readily than those imposed by local governments in some areas where there is a lingering popular expectation government services should be free, that is, tax supported. An authority can be a device to achieve user cost financing when it is politically difficult for a local government to do so.

As governmental entities, authorities enjoy certain advantages over private companies operating services such as public water supply and solid waste disposal. As governments, they do not pay corporate taxes or sales taxes when they purchase supplies, they can issue tax-exempt debt at a lower rate than private corporations and their rate structure does not need to include a return to shareholders.

Administrative Reasons. Reasons grouped under this heading are based on the proposition an authority can administer certain entrepreneurial-type services more efficiently than a municipal government. Many functions commonly provided by authorities are in traditional areas of public utilities where business traditions and concepts of administration are needed. Authority functions often require intensive planning and a long-range approach more likely to be found in a business-type operation than in government.

Delegation of overseeing a complex function to a group of citizens other than the elected officials spreads the workload and responsibility for providing public services to a wider base in the community. It relieves some of the burden from the elected governing body, already responsible for overseeing a wide range of governmental functions. Since most authorities perform only one function, the authority board can concentrate its energies on this single area.

Removal of authority affairs from close popular control allows it to make decisions beneficial to the public in the long run, but possibly unpopular in the short run. Under the terms of their bond indentures, authorities must create reserves to provide sufficient funds to meet any emergency. Creation of prudent reserves is more difficult for elected officials who must offset the desire to maintain voter approval by minimizing costs against the demands of financial prudence.

Authority board members have five-year overlapping terms, thus ensuring a large measure of independence. Greater continuity of management personnel is also possible where the governing board does not have to face the electorate. An authority is able to select its own employees. Capable people can be attracted because tenure is more certain. There is no immediate change in office with elections.

Authorities can often attract more qualified people as board members. Often well-qualified individuals who would hesitate to run for elective office will agree to accept an appointment to serve on an authority board.

Jurisdictional Reasons. Many public services can be administered efficiently only if a large service area is covered. Political boundaries and the boundaries of this ideal service area seldom coincide. A joint authority, as a separate entity created by a number of municipalities, can provide a specific service for the larger area. It is not the only way to solve this problem, but it is politically acceptable, convenient and familiar to local officials and citizens. Water and sewer authorities commonly serve more than one municipality to take advantages of the economies of scale and natural drainage areas. Joint authorities are also used for such services as airports, recreation and mass transit.

Distinctions between Authorities and Municipalities

Authorities have certain characteristics causing them to resemble a private utility corporation, but they also possess many features of a municipal government. It has become customary to speak of an authority as a government business venture. This is a reasonably accurate statement, if leasebacks are excluded. Municipal authorities resemble municipal governments in some ways.

  1. They are exempt from taxation. This exemption applies to property owned and transactions conducted by the authority. Furthermore, interest on authority bonds is excluded from state and federal income taxes.
  2. Authorities may levy and enforce special assessments against properties served.
  3. Authorities possess the power of eminent domain to acquire real estate.
  4. Municipal authorities may participate in the Pennsylvania Municipal Retirement System.
  5. Authorities and municipalities are both subject to general state laws protecting the public interest, including the Sunshine Law, the Open Records Act and the State Ethics Act.

A municipal authority differs from a municipal government in a number of significant ways such as:

  1. A municipal government is a “general purpose” unit of government, exercising powers of both a governmental and entrepreneurial nature. It has residual police powers to protect the public safety, health and general welfare. By contrast an authority exercises a limited entrepreneurial power only.
  2. A municipal governing body is elected and subject to the express wishes of the voters. An authority board is appointed and thus some distance removed from the voters. An authority can raise and spend money without reference to the immediate wishes of the electorate, while government officials raising and spending money must face the voters at the next election.
  1. A municipality has the power to tax and raise additional revenues through a wide variety of franchise fees, rents, user fees and service charges. Authorities are limited to the revenues generated by their project such as user charges, connection fees and special assessments.
  2. Operating under the Municipality Authorities Act, authorities are free of many of the restraints that state law imposes on the administrative, budgetary and personnel practices of municipalities under the various municipal codes. While the Act does impose some restraints on the operations of an authority they are not as pervasive as those included in the municipal codes.
  3. Most municipal authorities concentrate on a single service while municipalities offer a multitude of services. As limited by its articles of incorporation, an authority is restricted as to the functions it may perform and is relatively free as to the methods it may use in providing those services or functions. On the other hand, municipalities have multiple responsibilities. Municipal officials are relatively free in determining the services to be rendered but they are more restricted as to the methods employed in carrying out their activities.

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