Author deMause on tax-exempt bonds, PILOTs, & TIFs

This is the first of a multi-part interview with Neil deMause, the Brooklyn-based co-author of the book Field of Schemes: How the Great Stadium Swindle Turns Public Money Into Private Profit, and writer of the companion web site. He testified at a 3/29/07 Congressional hearing that questioned taxpayer financing of stadiums, convention centers, and hotels.

Q. One thing I learned from the book is that sports facilities like the proposed Atlantic Yards arena have leases for just one dollar because the building has to be nominally publicly owned--and the developer pays off construction costs via PILOTs (payments in lieu of taxes), a "loophole," according to the IRS.

A. Prior to 1986, you could finance a stadium with tax-exempt bonds, which are cheaper because they’re tax-exempt. You don’t have to pay as much interest to the bond holders, so they’ll take a lower interest rate. It’s great for cities, because it lowers their costs. It’s terrible for the federal government, because they get nothing out of it; all that happens is suddenly there are all these extra bonds they’re not getting taxes on. It was soaking up all the available tax-exempt bonds, because everyone was using them for these big private projects. So in ‘86, they instituted limits on private activity bonds, particularly on sports facilities, saying, “OK if this really a private project, if the city is just lending its bonding capacity for a private project and it’s going to make money with private revenue, you can’t do it.” The limit was, if more than 10% of the facility is private use and more than 10% of the cost is paid off by revenues from facility, then you can’t do it. This was [Senator Daniel Patrick] Moynihan’s attempt to close off tax-exempt bonds used for stadiums.

Immediately, what cities started doing is saying is, “OK, well, we just won’t charge you any rent.”

The arcane world of tax-exempt bonds

Q. I’m flabbergasted that I and a lot of other people looking at Atlantic Yards didn’t really know this.

A. No one understands this. When it started coming up for the Jets project, they were going to use this end run, PILOT [payments in lieu of taxes] payments; instead of calling it rent, they would say, “OK, it’s PILOTs,” even though they claimed it wouldn’t actually be subject to property taxes, because it’s on public land. They said this isn’t rent, it’s tax money, even though it’s a special tax just for them. The Jets thing never happened, the Yankees and Mets used the same structure, got away with it and now the Nets are trying to use the same thing. When the Jets [plan] came up, in 2004, I was calling around the country, trying to find someone who understood was whether it’s legal. I called Dennis Zimmerman [formerly of the Congressional Research Service], who said, “That doesn’t sound legal to me, but I’m sure there are plenty of bond lawyers who can convince a judge or the IRS that it is.” So you really had folks in Dan Doctoroff’s office who were really breaking new ground.

You had this City Council Finance Committee hearing for the Yankees, where the Yankees were simultaneously saying "This isn’t private money, this is tax money, so therefore we can use tax-exempt bonds, and you should go ahead with this project because it wouldn’t require any tax money."And nobody questioned them on it.

PILOTs vs. TIFs

Q. One thing I learned from the book: PILOTs don’t need legislative approval but TIFs do. And TIFs were first thought to be the plan for Atlantic Yards.

A. This was the genius of the Jets plan. Doctoroff was proposing a TIF for the Jets plan, and it was not going over very well. I was writing a lot of stuff for the Voice, interviewing people who said TIFs are horrible. I think he realized it was going to be difficult getting it through state legislature and realized, “Oh, a TIF district has to be approved by the state legislature, but a PILOT is just ‘redirecting property taxes’ and we can do that without the state.”

Of course he forgot about the PACB [Public Authorities Control Board], so he wound up having Sheldon Silver block his deal anyway. Just the ways they’ve gone around public oversight in all these deals has been remarkable. They had the alienation of the parkland for the Yankees pushed through in eight days.