So, would the $800 million in tax-exempt bonds for AY count as a public subsidy? Not under Zimbalist's logic, given that, in a 1/22/06 New York Times op-ed, he blessed a similar financing plan for the new Yankees Stadium, contrasting it with the West Side Stadium by noting that "the Bronx is already in a tax abatement zone."
But maybe that's not quite right--and it deserves scrutiny as the State Assembly takes up tax-exempt financing for the Yankees, if not the Nets, during a hearing on Wednesday.
There's increasingly less justification for such tax exemptions. Just as the city's longstanding 421-a tax exemption for outer-borough residential construction recently got an overhaul, given that the residential market had long since improved in certain neighborhoods, so have there been recent calls to reform the city's Industrial and Commercial Incentive Program (ICIP), on which the AY arena tax exemption would rely.
The PILOTs game
Let's recap. Neither Zimbalist's May 2004 report nor his June 2005 update looked deeply at the financing arrangement: the use of tax-exempt bonds repaid via PILOTs, or payments in lieu of taxes. Atlantic Yards critics, notably lawyer and urban planner Michael D.D. White, have argued that this essentially would give Forest City Ratner the arena for free, since it would be paying only the equivalent of real estate taxes, rather than both taxes and construction bond repayments.
The government's argument is that the waiving of taxes is an inducement to build (of course that should've raised the value of the railyard bid), while the PILOT arrangement--now questioned by federal regulators--allows the issuance of bonds. In fact, the Independent Budget Office, in its September 2005 report, did not treat it as the equivalent of a direct subsidy.
Zimbalist on the West Side Stadium
However, consider this contrast. In an 11/14/04 New York Times op-ed on the West Side Stadium headlined Games People Play, Zimbalist attacked PILOTs:
The proposed financing plan for the stadium contains other hidden public costs. Under the plan, the city and state would form a local development corporation. Among other things, this quasi-public entity would issue bonds to finance roughly $400 million of the Jets' $800 million contribution. The team would cover the debt service on those bonds. But it would do so under a financial arrangement known as a "pilot," or payment in lieu of taxes. To the extent that this payback scheme is in place of the Jets' paying sales and property taxes, doesn't it make sense for the $400 million to be considered a public, rather than a private, contribution?
Note that, of the projected $950 million cost of the Atlantic Yards arena, Forest City Ratner CEO Bruce Ratner told the New York Times that $800 million in tax-exempt bonds would be sought.
Zimbalist didn't address that issue in his report. Rather, he suggested that only $200 million in direct contributions was expected and also inaccurately speculated that additional contributions were unlikely.
Foregone property taxes?
Zimbalist stated in his report on AY:
Second, FCRC will pay no property tax on the improved value (the arena) on the land. Nonetheless, to be cautious, I add the foregone property taxes as a cost to the city, after taking account of the as-of-right ICIP tax abatement program that would apply to any commercial building project on the site.
Zimbalist calculated a 2006 net present value of $24.6 million for those foregone property taxes; the only property taxes that would count would be the modest ones outside of the ICIP abatement. Thus the PILOTs disappear.
IBO's George Sweeting explained the arena tax benefit:
ICIP in that part of Brooklyn provides for 16 years of full exemption followed by a 9 year phase-in towards full taxes. There is also 'inflation protection' in the first twelve years.
ICIP, which was created in November 1984 (its precursor was created in 1976), was due to expire today: June 30, 2008. A report, titled Senseless Subsidies, issued 5/29/08 by Manhattan Borough President Scott Stringer criticized the tax break:
Finally, in the spring of 2007, prior to the most recent reauthorization of ICIP, the City's Economic Development Corporation working with the Office of Management and Budget and Department of Finance, completed a study that identified ways to restructure and streamline ICIP to better target the types of development most in need of incentives. While the proposed reforms were not widely released, reportedly because of fear that they would be unpopular with developers, they were cheered by progressive and good-government groups. In the end, the state and the City failed to adopt the proposed reforms and passed legislation extending ICIP in its current form for one year, until June 30, 2008.
Stringer's report recommended some changes:
Already, in a large portion of Manhattan, ICIP exemptions are available only to businesses making a construction expenditure that is proportionally larger than expenditures made elsewhere in New York City. Other parts of the City benefiting in past years from strong real estate development should be similarly identified, and the qualification criteria for ICIP exemptions in these areas should be expanded to include a determination of need made by the NYC Economic Development Corporation. Such a determination of need would temper ICIP's unrestrained as-of-right approach, which has produced enormous fiscal losses for the City.
Among the provisions driving the fiscal loss to the city, according to NYC EDC's report, include long benefit periods and inflation protection, both of which can cost the city but are worth little to developers as they make their decisions. The report recommends a shorter benefit period and elimination of inflation protection.
Both could shrink the tax exemption for the arena site, and thus could cap the amount of the PILOTs that would essentially be subsidies.
Only modest changes
As it turns out, the city supported only modest reforms, according to the New York Observer, citing both political pressure and the fear of slowing development. Mayor Mike Bloomberg, however, called the changes the result of "a hard look." (Here's the bill.)
Still, it's worth recalculating the amount of foregone property tax. And, as Zimbalist should have done, it's worth analyzing whether such incentives are in fact necessary for building on what Forest City Enterprises executive Chuck Ratner calls "a great piece of real estate."
In other words, if the financing for the West Side Stadium was a "payback scheme," wouldn't the same apply to the financing for the AY arena?
Zimbalist on democracy
In the West Side Stadium op-ed, Zimbalist wrote:
When Rudolph W. Giuliani was mayor, he opposed the idea of a referendum on public financing for a new Yankee Stadium on Manhattan's West Side. His reasoning was that were it put to a referendum, New Yorkers would vote it down.
Now Mayor Michael R. Bloomberg is doing Mayor Giuliani one better. He plans not only to avoid a popular vote but also to bypass a budgetary vote of the people's elected representatives on the City Council.
If the stadium's economic benefits are as obvious as Joe Namath asserts, the project's supporters should have no problem with standard democratic operating procedures and full disclosure.
Of course, with Atlantic Yards, the financing was not put to a referendum.
Nor did the City Council get a vote, as the project bypassed ULURP, the city's Uniform Land Use Review Procedure. If the arena's economic benefits are as obvious as the city, state, and developer assert, then there should have been full disclosure and democratic oversight, according to Zimbalist's logic.
But he's said nothing of the sort regarding Atlantic Yards.