Local Government Commission Approval of Certain Public Enterprise Agreements

The Local Government Commission (LGC) is a nine-member state body situated in the Department of State Treasurer. G.S. Ch. 159, Art. 2. The commission monitors the fiscal management and financial condition of local governments and public authorities (providing assistance and engaging in more active interventions when needed), and approves the issuance of debt and certain other borrowings by local units. Most local government officials are aware of these dual functions of the LGC. Sometimes overlooked are the requirements for LGC approval of certain non-debt agreements, such as leases and other contracts involving capital assets. A previous blog post summarizes these requirements and provides detailed flowcharts to help local officials determine when LGC approval is required. This past fall (October 2023), the legislature made a new set of agreements involving public enterprises subject to LGC approval. The new requirements come from Part IV of S.L. 2023-138 and will be codified in G.S. 159-154. It compels LGC approval of any agreement in which a local government or public authority concedes or transfers control of a public enterprise that the local government owns or operates to a nongovernmental entity. It also mandates that the local unit’s governing board hold a public hearing on the agreement and make certain findings before proceeding. This blog post details the specific public enterprise contracts this new law applies to and discusses the process requirements and criteria for approval.

Defining Public Enterprise

In unpacking the new requirements, let’s first focus on what constitutes a public enterprise. For counties, public enterprises are defined in G.S. 153A-274 as any of the following:

• Water supply and distribution systems.
• Wastewater collection, treatment, and disposal systems of all types, including septic tank systems or other on‐site collection or disposal facilities or systems.
• Solid waste collection and disposal systems and facilities.
• Airports
• Off‐street parking facilities.
• Public transportation systems.
• Stormwater management programs designed to protect water quality by controlling the level of pollutants in, and the quantity and flow of, stormwater and structural and natural stormwater and drainage systems of all types.

For municipalities, public enterprises are defined in G.S. 160A-311:

• Electric power generation, transmission, and distribution systems.
• Water supply and distribution systems.
• Wastewater collection, treatment, and disposal systems of all types, including septic tank systems or other on‐site collection or disposal facilities or systems.
• Gas production, storage, transmission, and distribution systems, where systems shall also include the purchase or lease of natural gas fields and natural gas reserves, the purchase of natural gas supplies, and the surveying, drilling and any other activities related to the exploration for natural gas, whether within the State or without.
• Public transportation systems.
• Solid waste collection and disposal systems and facilities.
• Cable television systems.
• Off‐street parking facilities and systems.
• Airports
• Stormwater management programs designed to protect water quality by controlling the level of pollutants in, and the quantity and flow of, stormwater and structural and natural stormwater and drainage systems of all types.

For public authorities, this law only applies to public enterprises authorized by Chapter 162A of the General Statutes. These are water, wastewater, and stormwater services provided by

• water and sewer authorities, G.S. 162A, Art. 1,
• county water and sewer districts, G.S. 162A, Art. 6,
• metropolitan water districts, G.S. 162A, Art. 4,
• metropolitan sewerage districts, G.S. 162A, Art. 5, and
• metropolitan water and sewerage districts, G.S. 162A, Art. 5A.

The law does not apply to other water and sewer providers, such as sanitary districts or those created by local act of the General Assembly, nor does it apply to public authorities carrying out other enterprise activities that are not listed in G.S. Ch. 162A.

What it Means to Concede or Transfer Control of a Public Enterprise to a Nongovernmental Entity

LGC approval is not required of all public enterprise agreements, only those in which the local government or public authority concedes or transfers control of all or a material portion of a public enterprise to a nongovernmental entity. Let’s take a closer look at what each of these terms means:

Nongovernmental entity. A nongovernmental entity includes any entity other than the State (or state agency), local government, public authority, or Joint Municipal Power Agency (formed pursuant to G.S. Ch. 159B).

Concede or Transfer. The new law does not define these terms. Concede likely means “to grant a right or privilege,” see Meriam-Webster Dictionary, to operate the public enterprise and make related decisions. It may be a reference to concession agreements, whereby a private entity is given he right to operate a local government enterprise for a period of time and under specified conditions. And transfer likely refers to the local government giving up ownership or possession (or both) of public enterprise assets.

Control. The term control is defined in the law. Control means that the private entity assumes any of the following as part of the agreement:

• • The authority to expend or otherwise manage during any fiscal year more than fifty percent (50%) of a public enterprise’s adjusted revenues. Adjusted revenues are gross revenues minus the cost of commodity purchases and wholesale electricity purchases, if applicable, for the public enterprise;
  • Responsibility for provision to the public of the services previously provided by the public enterprise;
  • Responsibility for operation and maintenance of a material portion of the assets and facilities of the public enterprise; or
  • The authority to manage a material portion of the staff responsible for operation and maintenance of the assets and facilities of the public enterprise.

Material portion. Unfortunately, the new law does not define material portion. And there is no universal definition or even common definition to analogize to. The phrase is sometimes used in real property contracts, but it is defined specifically (and uniquely) by the parties to those contracts. Analyzing the new law as a whole, it seems reasonable to assume that an agreement to transfer more than 50 percent ownership of a public enterprise’s assets/system, or to concede more than 50 percent operational and maintenance responsibility for the public enterprise assets/services, or to concede the management of more than 50 percent of the public enterprise’s staff constitutes a material portion. But what about something less than 50 percent? It is hard to know. Factors a court might consider include the degree to which the private entity has decision-making authority over the operations and services provided by the public enterprise and/or how reliant the public enterprise is on the nongovernmental entity to be able to provide the enterprise services. A local unit must work with its attorney to make this determination.

Statutory Exemptions

Putting it all together, the new law likely applies to a variety of public enterprise agreements–some involving partial or full sales of public enterprises to private entities and others involving operating agreements.

Certain public enterprise contracts that might otherwise fall under its purview are explicitly exempted from the new law – namely those that solely involve the maintenance of a public enterprise by a nongovernmental entity, regardless of the fee structure for the maintenance agreement. A sale of a public enterprise to a public utility regulated by the State’s Utilities Commission is also exempted, but not other transactions involving transferring or conceding control (short of a full sale) to a regulated utility. What about granting an operational franchise to a private entity? If the nature of the franchise agreement meets the definition of transferring or conceding control of the local unit’s public enterprise, as discussed above, that agreement is subject to this law.

Requirements for Covered Public Enterprise Arrangements

Now that we know what public enterprise contracts are subject to the new law, we’ll turn to the specific requirements. Before a local government or public authority executes a public enterprise agreement that transfers or concedes control to a nongovernmental entity, it must (1) hold a public hearing; (2) make certain findings; and (3) get LGC approval.

Public Hearing. The local unit’s governing board must hold a public hearing on the proposed arrangement. Notice of the hearing, describing the agreement in general terms, must be published in a newspaper of general circulation in the county(ies) in which the local unit is located at least 10 days before the public hearing. The purpose of the hearing is to assist the governing board in determining whether the proposed arrangement is in the public interest.

Governing Board Findings and Approval. After the public hearing, the local unit’s governing board may proceed only after adopting a resolution declaring that the proposed arrangement is in the public interest. In making this determination, the board must consider ALL the following:

1. 1. The physical condition of the public enterprise;
   2. The capital replacements, additions, expansions, and repairs needed for the public enterprise to provide reliable service and meet all applicable federal standards;
   3. The availability of federal and State grants and loans for system upgrades and repairs of the public enterprise;
   4. The willingness and the ability of the nongovernmental entity to make system upgrades and repairs and provide high‑quality and cost‑effective service;
   5. The reasonableness of the amount to be paid to the unit of local government to enter the arrangement;
   6. The reasonableness of any amounts to be paid by the unit of local government to exit the arrangement;
   7. The service quality guarantees provided by the arrangement and the consequences of any failure to satisfy the guarantees;
   8. The most recent income and expense statement and asset and liabilities balance sheet of the nongovernmental entity and any consolidated nongovernmental entity;
   9. The projected rates to customers of the public enterprise during the term of the arrangement and the affordability of the services of the public enterprise resulting from such projected rates;
   10. The experience of the nongovernmental entity (and, if applicable, its affiliates within the consolidated nongovernmental entity) in the operation of utility systems similar to the public enterprise that is the subject of the arrangement; and
   11. The alternatives to entering the arrangement and the potential impact on utility customers if the arrangement is not entered.

Local units should record the governing board’s findings addressing all these considerations as part of the written resolution or supporting documentation.

LGC Approval. Once the governing board adopts its resolution, the LGC may consider the proposed arrangement for approval. Like a bond issuance, the local government will apply to the LGC for approval and work with Department of State Treasurer staff to prepare the appropriate documentation and address any concerns. If a local unit is considering a public enterprise arrangement that requires LGC approval, it should contact staff as soon as possible to map out required steps and prepare and submit appropriate documents. For example, the LGC may require that the local unit engage a qualified independent expert to prepare projections or other analysis related to the proposed arrangement.

The LGC may only approve the proposed arrangement if it “finds and determines that the customers of the public enterprise will enjoy reasonable and material short‑term and long‑term savings and other net benefits from the arrangement during the term of the arrangement without the imposition of any material cost or charge on the [local government or public authority] or its customers upon termination of the arrangement.”

The LGC may consider any of the following in making its determination (this is a non-exclusive list):

1. 1. The projected financial feasibility of the proposed arrangement in the short‑term and long‑term, its effect on rates to be charged to the customers of the public enterprise under the arrangements being proposed, and its effect on the quality of services to be provided by the public enterprise under the arrangement.
   2. The projected rates to customers of the public enterprise during the term of the arrangement, the basis for the establishment of such rates and the reasonableness of the basis, and the affordability of the services of the public enterprise resulting from such projected rates.
   3. If the unit of local government will receive an initial payment for participating in the arrangement, a summary of the unit of local government’s proposed plans for the use of the initial payment.
   4. If there is any indebtedness of the unit of local government associated with the public enterprise, the plans for the retirement or defeasance of such indebtedness.
   5. The financial condition of the nongovernmental entity and its affiliates within the consolidated nongovernmental entity and its ability to carry out the undertakings required of the nongovernmental entity in the arrangement.
   6. The experience of the nongovernmental entity and its affiliates within the consolidated non‑governmental entity in the operation of utility systems similar to the public enterprise that is the subject of the arrangement.
   7. The nongovernmental entity’s plans to finance its initial participation in the arrangement and future improvements to the public enterprise and the expected participation of the unit of local government in any financing.
   8. The obligations of the nongovernmental entity set forth in the agreement for the maintenance of the public enterprise and the installation of improvements to the public enterprise during the term of the arrangement and the requirements of the agreement that adequate reserves be maintained during the term of the arrangement for such maintenance and improvements.
   9. The plans set forth in the agreements for the arrangement for maintaining the quality of the components of the public enterprise to be returned to the control of the unit of local government at the end of the term of the agreement.
   10. Any ongoing financial and other commitments of the unit of local government under the arrangement during its term.
   11. Any financial payments the unit of local government is expected to be required to pay to the nongovernmental entity or any other person or entity at the end of the arrangement.
   12. The effect, if any, of the arrangement on the tax status of interest on debt obligations issued by the unit of local government, or any other units of local government on account of contractual arrangements the other unit of local government may have with the unit of local government proposing the agreement being considered.

The LGC must issue an order approving or denying the application.

LGC Approval of Amendments to or Termination of an Approved Arrangement

A local unit must also get LGC approval (following a similar process) of any material amendments to the originally-approved arrangement or of a proposed termination of the arrangement prior to its stated end period, unless the termination is for breach of contract.

Effective Date of New Law

The new law became effective on October 10, 2023, and applies to any covered public enterprise agreements executed on or after that date. It will also apply to renewals of agreements executed prior to that date that meet the definition of transferring or conceding control of the public enterprise to a nongovernmental entity.

Consequences of Failure to Follow New Law

As with other contracts requiring LGC approval, any agreement subject to this new law that is executed without LGC approval is void. And the law makes it unlawful for any officer, employee, or agent of a local unit to take any actions pursuant to the agreement.

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