Governor Signs Assembly Bill 2650 Increasing Oversight of Publicly Funded Projects
October 12, 2009
By Patrick J. McNamara | Governor Jon Corzine recently signed into law Assembly Bill 2650. The bill was developed in response to the issues that were uncovered in the various investigations regarding the financial transactions surrounding the now-bankrupt EnCap Golf project.
The new law is designed to prevent the misuse of public funds used for redevelopment or remediation projects and requires private entities receiving over $50 million in public funding by grant and/or loan to comply with stricter reporting standards designed to provide much greater transparency when the use of public funds is involved with such projects.
For developers and redevelopers that meet or exceed the financial assistance threshold for qualifying public contracts, the following rules and requirements are now imposed:
- For the total spending on project costs, the developer must contribute at least $1.00 from other sources for every $5.00 derived from the public entity supporting the project;
- The public entity providing funding would be required to retain up to 10% of the amount of the assistance provided pending completion of the project, subject to any regulatory requirements for retention or escrow of a greater amount;
- The public entity would have to review the qualifications of project subcontractors hired to perform work on the project;
- The developer must post a performance bond equal to at least 110% of the cost of the publicly funded improvements under the project;
- The developer must file audited financial statements annually for the project and for the business itself, and would have to continue to do so annually throughout the life of the project. The business, as well as the auditor performing the work, would have to comply with various financial reporting and business auditor requirements similar to those imposed under the Sarbanes-Oxley Act; and
- The office of the State Comptroller is authorized to audit the business’s use of any public funds to which the legislation would apply and expenditure of other funds on the project.
Failure to Submit Financial Statement or Report
The law also provides that any recipient business that knowingly fails to submit a financial statement or report, or makes any material misrepresentation in any application, report, or other disclosure it is required to make under the bill, would have to refund the entire amount of financial assistance provided by a granting public entity. If the public entity had to pursue a refund, the law provides that it can recoup its attorney fees and other costs in pursuing such an action. The developer is also required to ensure the preservation of all documents pertaining to the funding and use of said funding on the project.
Legislative Fiscal Estimate
It is worth noting that the legislative fiscal estimate prepared for the bill could not quantify the fiscal impact of the legislation. It did acknowledge that the bill would effectively create an insurance policy for governmental entities providing funding above the $50 million threshold for redevelopment, remediation or environmental infrastructure projects. The statement also noted that it would regularly increase the cost to State and local governments in undertaking such projects, as the size of the assistance to contractors would rise along with the governmental costs of administering the contracts. It also noted that the Treasury Department would incur additional costs as it will become the central depository for all required documents.
The bill gives the Treasury Department the authority to coordinate the administration of contracts signed by governmental entities. It would also increase the contracting governmental entity’s cost of administrating the contract for review and management of the documents in question. The fiscal estimate also noted that for privately held companies, the reporting and auditing requirements that parallel the Sarbanes-Oxley Act would impose a greater cost. The fiscal estimate goes on to state:
“All these new requirements could erect a barrier for entry for potential competitors, especially for businesses that are not publicly traded. Instead of complying with the new standards, firms may decide to avoid the additional expense by not seeking to undertake a project. Fewer contracting options would hence exist for public entities. Having acquired more pricing power, the remaining competitors could angle for a more significant mark up by demanding more public assistance as a condition of undertaking a project.”
Available Grants and Loans
Given the current state of the economy and the financial markets, developers are now looking for various sources of grants and loans that are offered by State agencies such as the New Jersey Economic Development Authority, as well as assistance from local municipalities and utility authorities. Any developer looking to assemble such funding now must take into account the potential transactional cost and the need to retain the appropriate professionals with backgrounds in areas that public financing, auditing and financial management in order to comply with this new law. There has not been an announcement yet from the Department of Treasury as to when it expects to have implementing regulations in place to manage this program.
This Scarinci Hollenbeck Client Alert has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel.