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How Sheldon Silver’s Scandal Reveals Albany’s Corruption

Sheldon Silver, a New York assemblyman for 38 years and a speaker for 21, was arrested by the FBI on January 22 and arraigned in federal court on five corruption charges. In public, Silver presented himself as a simple personal-injury lawyer. Behind closed doors, he was steering real-estate developers and asbestos claimants to law firms that paid him more than $6 million in kickbacks since 2002.

“How could Speaker Silver,” asked U.S. attorney Preet Bharara, “one of the most powerful men in all of New York, earn millions of dollars in outside income without deeply compromising his ability to honestly serve his constituents?”

The answer says less about Sheldon Silver’s morals and more about New York’s shady regulatory and spending regime. A review of Bharara’s federal complaint against Sheldon Silver finds New York’s government to be nearly purpose-built for corruption. Albany, Bharara concluded, sits at the “intersection of ambition and greed.”

The New York legislature plays a substantial role in regulating the real-estate industry. There are laws governing “real estate taxation, rent, land use, and other matters,” according to the federal complaint, all of which motivate concerned parties to lobby state legislators intensively. New York sponsors and provides subsidies and tax incentives directly to the real-estate industry.

The 80/20 Housing Program, for instance, provides developers government-subsidized financing and tax credits in exchange for ensuring that at least 20 percent of newly built units are affordable—that is, with rents taking up 30 percent or less of income for the households earning less than half the area’s median pay. There’s also the 421a Property Tax Exemption Program that offers substantial real-estate tax abatements—nearly $1.1 billion in deferred tax revenue in New York City alone—in exchange for building multi-family rental housing. Both programs are due to expire in June 2015, so intense negotiations are ongoing about how to renew them. Sheldon Silver was found to have profited from real-estate developers who were looking to influence both the shape of these programs and their direct impact on the properties they owned.

“Subsidies are like sweets: easily satisfying but hardly filling.”

The New York assembly has enormous sway over rent regulations and tax abatements, which themselves exist only as a function of the state’s high cost of living and burdensome rate of taxes. When these programs expire, they must be renegotiated and approved by the state legislature, while the direct taxation of buildings remains a city matter. Building owners often spend enormous sums on lobbyists and lawyers to influence both ends of this process. For instance, owners are pushing the state to increase the size and scope of its subsidies and abatements while also asking the city for a reduced tax assessment; the lobbyists get their pay, and the lawyers get a cut of the value of the tax reduction. Because most of these cases involve large buildings, the payouts are also large. Silver referred building owners in his district to the law firm with which he was affiliated, Weitz & Luxenberg, receiving a cut of what soon became 31 percent of the firm’s revenue.

No wonder, then, that the real-estate developer retaining Silver’s law firm was found by federal investigators to have an “overwhelming percentage of its business tied to state programs and regulations.” Indeed, the developer “often negotiates with leaders of state government, including Sheldon Silver.” It is far from alone. Another developer, whose business operates in Silver’s district, was referred to a real-estate law firm (unnamed in the complaint against Silver) without mention of Silver’s ties to this firm or the referral fee he was due to receive. That developer was also “dependent on state government approvals for state tax abatement programs and other official actions.”

Developers are now the largest political donors in New York. From 2005 to 2014, one developer alone (Glenwood Management) contributed more than $10 million to state candidates and their political-action committees. Of that sum, $200,000 went into Sheldon Silver’s campaign coffers. Of course, the influence game does not end on Election Day. This same developer spent $900,000 to pay eight lobbyists to lobby the state assembly on real-estate matters.

And real estate is only the beginning. Sheldon Silver was also well known as the biggest protector of the medical-malpractice industry, and for his close and lucrative relationship with asbestos-liability lawyers. When Joe Morelle, the majority leader of the New York Assembly, proposed amending the 1885 Scaffold Law to allow juries to determine whether workers were partly to blame in “gravity-related” construction injuries, Silver immediately killed the proposal. Reporters questioned at the time whether he might have had a personal stake in keeping the law in place; he angrily retorted, according to the New York Times, “I don’t think it’s a conflict.”

In fact, Silver controlled the $8.5 million that the assembly allocated annually, under the New York Health Care Reform Act, to a discretionary fund. Until 2005, his disbursements from that fund, known as the HCRA-Assembly Pool, were not disclosed in the state budget. State law required that, to request a dispersal of such funds, the assembly speaker send a one-page form to the state department of health—and that was it. The state approved Silver’s requests as a matter of form. His disbursements were not subject to a formal application process or peer review, unlike every other grant from the department of health.

Silver in fact gave $500,000 in two grants from the HCRA-Assembly Pool to one doctor to help fund research into mesothelioma, a rare and expensive malady linked with asbestos exposure. Silver then recommended that the doctor direct his patients to the law firm with which Silver was affiliated in order to pursue asbestos lawsuits. The doctor was not aware of Silver’s referral fee. When the grants stopped, the doctor ceased his referrals to this law firm, instead directing them to another, more philanthropically minded firm.

In 2005, the New York budget began disclosing dispersals from the HCRA-Assembly Pool, but only as lump-sum figures without mention of recipients or use. The State Budget Reform Act of 2007 ultimately abolished the lump-sum appropriations found within the HRCA-Assembly Pool and required itemized appropriations. It was around that time that Silver told the doctor doing mesothelioma research that he wouldn’t be receiving any more grants.

As for the asbestos cases that Silver’s law firm was handling, they appeared before a handpicked division of New York judges. The “hand,” as it were, belonged to a committee that included Arthur Luxenberg of Weitz & Luxenberg—the same law firm that was paying Silver for the asbestos referrals. And who placed Luxenberg on the committee? Sheldon Silver.

Sheldon Silver’s alleged wrongdoing is rooted in the institutional structure of New York’s state government. A complex government flush with cash and parochial concerns is readymade for corruption. No wonder that since 2000, 28 New York public officials have left office in disgrace and another four may soon be added to that list.

With the downfall of Sheldon Silver, there are now calls for Albany to get serious about ethics reforms. Among the measures under discussion are term limits, bans or caps on outside income, and letting rank-and-file Assembly members have more say over when bills get a vote. Efforts at fighting Albany’s endemic careerism are particularly admirable when achieved through the ballot box.

But all these measures risk being too weak by half. Term limits in particular often lead to inexperienced legislators who are under the sway of outsiders. The real target for reform should be public cronyism. State programs doling out goodies to specific business interests, particularly ones that are already highly regulated and that involve large sums of money, should be the first to go. Not only would this improve public accountability, but businesses would operate in a more secure and certain environment if they were no longer compelled to chase capricious government dollars. Subsidies are like sweets, after all: easily satisfying but hardly filling.

The targets for such reform shouldn’t be hard to find. For instance, Governor Andrew Cuomo’s latest state-budget proposal allocates $3.05 billion for a “Special Infrastructure Account,” a portion of which is meant to provide loans and grants to developers. Similar efforts enabled Governor Cuomo to provide the real estate firm Glenwood Management—which, as previously mentioned, gave generously to Sheldon Silver as well as to Mr. Cuomo—with a $250 million state-supported, low-interest loan for a luxury housing development.

Simply having fewer government programs would help, as would axing the amount of public spending in New York State. The state’s latest budget proposal totals $150 billion. If enacted, it would be among the largest state budgets in the union. Allocating a sizeable budget such as this dramatically increases the opportunities for rent-seeking, particularly when those sums are divided between lots of smaller programs with questionable accounting. Moreover, efforts at reducing the high tax rates necessary to sustain this burden often end up only encouraging the accumulation of carve-outs.

Another good step would be enacting a statewide “open data” bill, as it’s known, to help expose Albany’s operations to the light of day. Governor Cuomo’s current open-data executive order is not permanent, and the state’s use of technology and degree of transparency lag behind New York City’s efforts. Curiously, the current initiatives have left out key data about which subcontractors are getting work from Albany and which are receiving state tax credits. One also struggles to find detailed reporting on lump-sum appropriations and on which funds are available for members’ pet projects.

New York officials are now empowered to dole out massive sums with little oversight, and the reams of red tape and extensive carve-outs ensure that a sizeable constituency in the private sector is dependent on this largesse year in and year out. The truth is that any government that depends for its functioning on men’s tendency to be angels will simply, by this expectation, help turn them into devils. Albany cannot legislate honesty, but it can create a system in which it is rewarded.

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