Friday, September 21, 2007

IBO calculates more (modest) costs to the city from AY arena

One more piece of the Atlantic Yards fiscal puzzle has been filled in. The use of tax exempt bonds for the Atlantic Yards arena would cost the city $5.2 million foregone tax revenue over 30 years, expressed in present value, according to a letter from the New York City Independent Budget Office (IBO), which in a 2005 report on the project had eschewed specific estimates.

As predicted in that report, the costs would be much higher for the federal government; IBO estimated the costs to the federal government of $103.7 million and to the state government of $9.5 million.

IBO in 2005 estimated total savings of $91 million to developer Forest City Ratner, based on an arena estimated to cost $555.3 million. Now, with an arena estimated to cost $637.2 million, IBO estimates savings of $82 million, a lower figure.

Why? Interests rates are now lower. "This is because the increase in the projected cost of the arena is more than offset by the effect of the lower interest rate," wrote IBO Deputy Director George Sweeting in a letter explaining the recalculations.

Cost adds up

While IBO in 2005 said that the cost of the bonds would pose “relatively little impact on New York City or State,” the additional $5.2 million calculated would appear to put the city further in the hole regarding the arena.

IBO had calculated a modest fiscal gain for the city, $28.5 based on a city contribution of $100 million. Now that the city contribution has grown to $205 million—some portion of which may not go directly to the arena—the city likely was facing a loss, I concluded. Sweeting confirmed to the Brooklyn Paper that such a loss was possible.

Genesis of estimate

IBO's new calculations came in response to an AYR request. I noticed recently that the agency, in response to a request from Good Jobs New York (GJNY), updated its estimate of the costs to the city, state, and federal governments resulting from the use of tax exempt bonds for the construction of the new Yankee Stadium.

So I wrote to IBO’s Sweeting:
I wonder if IBO could similarly update its 2005 estimate of the costs to the city, state, and federal governments resulting from the use of tax exempt bonds for the construction of the planned Brooklyn Arena, part of Atlantic Yards.

Not only have interest rates changed, but also the cost of the arena has risen, and the city's planned contribution has grown from $100 million to $205 million. I believe more accurate estimates would enhance and clarify the public discussion.

I pointed out that I had already speculated that the increased city contribution, if plugged into the previous IBO report, suggests a net loss for the city.

IBO clarification

Sweeting responded that IBO’s 2005 report did not actually provide an estimate of the foregone income tax revenue due to use of tax exempt bonds, because of the need to make assumptions about the the bond purchasers and the uncertainty regarding changing federal tax law. Thanks to a ruling by the Internal Revenue Service as well as improved internal techniques, he said, IBO could produce a new estimate.

While the IBO's responsiveness is welcome, there's certainly an argument, given the shifting costs and benefits, to do a full revision. That's apparently not in the cards. Sweeting wrote:
We will go ahead with this calculation, but it remains unlikely that we will re-work the entire fiscal impact analysis, given other demands on our resources. (By the way, that is similar to what we recently did for GJNY. We did not revisit our whole analysis of the baseball stadiums, only the part relating to the tax exempt bonds.)

IBO letter

Today, I received the following letter from Sweeting, which is also posted on the IBO web site. The relevant sections:

Per your request, IBO has prepared estimates of the fiscal costs of the city and state decision giving Forest City Ratner Companies (FCRC) access to tax exempt bond financing for construction of the basketball arena portion of the Atlantic Yards project. In IBO’s 2005 analysis of the fiscal impact of the Atlantic Yards project we had noted that there would be moderate fiscal costs associated with this financing, although at the time we were not prepared to offer a specific estimate.

Allowing FCRC to use tax-exempt bonds to finance the arena construction saves FCRC money because tax-exempt bonds generally pay a lower interest rate than taxable bonds, which results in debt service savings for the developer. In addition, because the interest is exempt from income tax, there are costs to the city, state, and federal governments equal to the tax revenue that they would have collected had the interest been taxable.

In estimating these costs, IBO assumed that the cost of the arena would be $637.2 million—up from the $555 million projection in 2005—and that the entire project would be financed with tax-exempt bonds. In our 2005 study we had pointed to a potential constraint under the Internal Revenue Code that might have limited the portion of the project that could qualify for tax-exempt financing. A recent ruling by the IRS regarding the financing for the new Yankee Stadium appears to clear the way for most, if not all, of the arena construction bonds to qualify for tax-exempt status. Our estimate assumes that the entire $637.2 million will be financed with tax-exempt bonds. The bonds were assumed to be 30 years with level payment and an interest rate of 4.5 percent. Note that the interest rate used in our new estimate is 1.5 percent lower than in our 2005 report. The estimates below are the 30 year net present values, using a discount rate of 6 percent.

Under these assumptions, the savings for FCRC are estimated at $82 million, which is lower than our 2005 estimate. This is because the increase in the projected cost of the arena is more than offset by the effect of the lower interest rate. The projected cost in foregone tax revenue for the city is $5.2 million over 30 years. The corresponding costs for the state and federal governments are $9.5 million and $103.7 million.

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