Saturday, August 19, 2006

Gaps in ESDC's fiscal impact study: another look at unmentioned costs

After another look at the numbers from the Empire State Development Corporation (ESDC) it's easier to see what the agency left out in its fiscal impact study and where other studies challenge it.

The fundamental point (and thanks to the commenter on my previous post) is this: the ESDC assumes that the present value of the public contribution is $545 million, and much evidence suggests that public costs would be much higher.

Perhaps the ESDC will be more forthcoming. Spokeswoman Jessica Copen e-mailed me yesterday, "We have received comments on the economic impact, expect more at the public hearing and will consider releasing further information once we have had chance to digest all comments."

ESDC calculations

In the General Project Plan, the ESDC states:
On a present value basis, the Project will generate $845.5 million of City tax revenues and $1.1 billion of State tax revenues. Thus the Project will generate $1.4 billion in net tax revenues in excess of the public contribution to the Project.

If city/state tax revenues reach a total of $1.945 billion and the net tax revenue figure is $1.4 billion, that suggests a public contribution of $545 million, all expressed in present value, which [updated] is defined as "today's value of a future payment, or stream of payments, discounted at some appropriate compound interest, or discount, rate." (The cumulative revenues and costs would much higher.)

Why $545 million?

How does the ESDC get to $545 million? That number undoubtedly includes $200 million in direct subsidies and $292.9 million from mortgage recording and sales tax exemptions, as noted in a 7/24/06 Bond Buyer article. (The direct subsidies are expressed in present value; however, it's not clear whether the tax exemptions are.)

There's no evidence that the ESDC is including public costs for schools, sanitation, and public safety.

Large public costs

There are costs beyond the direct ones. Forest City Ratner consultant Andrew Zimbalist estimated a present value of all public sector costs at $572.6 million, including $200 million in direct subsidies and $321.4 million in operating costs.

But the Independent Budget Office (IBO) said Zimbalist's estimates on operating costs were too low. The IBO estimated a present value of $475 million in operating costs, which is $153.6 million more than Zimbalist's estimate of $321.4 million.

Thus, adjusting Zimbalist's total with the IBO's operating cost estimate leads to a total, in public sector costs, of at least $726.2 million ($572.6 million + $153.6 million).

Tax exemptions

But Zimbalist didn't consider the mortgage recording and sales tax exemptions. The IBO did calculate sales tax exemptions worth $9.1 million in present value. The IBO said that "Mortgage recording tax savings are not likely to be significant because the arena construction is being financed through PILOT-backed bonds."

However, the Bond Buyer, drawing on information from the ESDC, calculated a much higher number of $292.9 million.

Housing subsidies

None of the reports apparently include the value of housing subsidies.

As noted, the Brooklyn Papers reported last year:
Officials from the Housing Development Corporation, a city housing fund that finances development projects, committed $67.5 million in subsidies. An article this week in the New York Sun estimated as much as $76 million in taxpayer-funded subsidies.

It's unclear whether these subsidies are expressed in present value.

Unmentioned costs

Develop Don't Destroy Brooklyn (DDDB) calculated $1.929 million in subsidies, expressed in cumulative total rather than present value, and, even though those numbers can be challenged, they include some other costs that deserve discussion.

In addition, DDDB points to an unspecified amount of extraordinary infrastructure costs, including the relocation and installation of public utility infrastructure, as well as brownfield tax credits.

Unmentioned by DDDB, but also likely, are state "green building" tax credits, for which Forest City Ratner likely will apply.

Public cost: over $1 billion?

Not including DDDB's numbers or the "green building" credits, the ESDC's calculations still require major adjustments. Assuming that the other subsidies have been expressed in present value, it's possible that the $292.9 million in tax exemptions and $76 million in housing subsidies should be added to the total of $726.2 million. That would increase the public cost to well over $1 billion.

And the net fiscal impact would not be $1.4 billion but $778 million.

That still sounds like a significant sum, but that's 44 percent less than the ESDC estimate.

My numbers may be off, since it's unclear whether some of these figures are expressed in present value or cumulative total.

Still, this exercise shows that, without more information, we can't rely on the ESDC's numbers. We know the costs have not been fully tallied. That also raises questions about the calculations regarding benefits. The net fiscal impact remains a mystery.

1 comment:

  1. Norman, you wrote:

    "If city/state tax revenues reach a total of $1.945 billion and the net tax revenue figure is $1.4 billion, that suggests a public contribution of $545 million, all expressed in present value, or money in hand now rather than accumulated over 30 years."

    The last phrase in the preceding sentence is misleading.

    "...or money in hand now rather than accumulated over 30 years."

    A present value calculation strives mainly to compare apples to apples. The relevant part is NOT the point in time at which condensed cash flows are counted. The calculation could as easily have focused on Future Value and taken the same set of assumptions and calculated values for a date 30 years in the future -- when the bonds mature.

    These modeling techniques merely give investors and others a picture of how things are expected to go and what the assumptions mean when boiled down to one or two numbers.

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