State governments face especially difficult issues of whether to incorporate their “independent” agencies in their reporting entity. A state established the Mohansic River Power Authority to construct and operate dams and to provide electric power to rural areas. The authority, a state-owned corporation, is governed by an independent board of directors, the 10 members of which are appointed by the governor. They can be removed only for criminal misconduct or comparable misdeeds. The board of directors has complete control over the authority’s operations. The authority does not need approval to issue debt, to sign contracts, or to hire managers. Its debt is not guaranteed by the state. Per the authority’s charter, any excess of revenues over expenditures is to be used for capital expansion or improvements or to offset future deficits. Because the authority is a public utility, the rates that it charges its customers must be approved by the state’s public utility commission. The public utility commission considers the authority’s request for rate adjustments just as if the authority were a private utility.

1. Do you believe that the state should include the authority in its reporting entity? If so, how? Justify your response, with reference to the GASB criteria. (This problem is based on an actual situation; there is no clear-cut solution.)

2. Suppose, instead, that the governor could remove members of the board at will. Would your answer be the same? Explain.

3. Suppose the members can serve indefinitely on the board, subject to annual reappointment by the governor. Would your answer be the same? Explain.