Monday, July 14, 2008

FCR consultant Zimbalist (in 2003): "no rationale" for federal subsidy of projects like AY arena

Ever wonder why Forest City Ratner consultant Andrew Zimbalist, the esteemed sports economist, titled his report (first issued in May 2004) on the developer's project Estimated Fiscal Impact of the Atlantic Yards Project on the New York City and New York State Treasuries?

Well, the report was aimed at getting city and state officials to back the project. And they did, like lemmings--as did editorialists.

But this was no "solid and verifiable analysis," as Frank Rashid of the Tiger Stadium Fan Club at a 3/29/07 hearing told Congress should be required for publicly funded projects.

After all, had Zimbalist calculated the impact on the federal treasury, well, he would've had to tell the truth and call it a loss from that angle, given that the subsidy for tax-exempt bonds--now worth perhaps $165 million to FCR--falls largely on federal taxpayers. (The arena has more than doubled in cost since Zimbalist issued his report in 2004, so the federal tax exemption has grown significantly.)

Contradicting himself?

Moreover, he would've had to quote his own, recently stated opposition to tax-exempt bonds for sports facilities, a new hot-button issue in New York City and Washington, given that the Internal Revenue Service wants to close a "loophole" that allowed a specific version of tax-exempt financing, using PILOTs (payments in lieu of taxes); the city and state want that loophole grandfathered in for the Atlantic Yards arena and additional Yankees and Mets stadium costs; and some in Congress want to get rid of tax-exempt financing altogether.

In other words, a full analysis of the plan, rather than one limited to the city and state treasuries, would have led Zimbalist to point out the uncomfortable truth that the arena financing plan might be bad public policy. But Consultant Zimbalist apparently trumped Scholar Zimbalist.

"No rationale" for federal subsidy

Like many professional economists, Zimbalist has looked at the evidence and found no support for a federal role. In his 2003 book, May the Best Team Win: Baseball Economics and Public Policy, he wrote (p. 140-141):
While one may legitimately question the costs and benefits to a particular metropolitan area of attracting a professional sports team, there appears to be no rationale whatsoever for the federal government to subsidize the financial tug-of-war among the cities to host ball clubs. If there is a global welfare gain from the relocation of a team from city A to city B (because city B may be larger or wealthier or have more avid sports fans), then city B ought to able to pay for that gain without a subvention from Washington, D.C.

It appeared back in 1986 that Congress had convinced itself of the irrationality of allowing a tax exemption from the interest on municipal bonds for stadium construction projects. The 1986 Tax Reform Act had a provision that stipulated that the interest exemption would not apply to facilities where more than 10 percent of the bond debt service was financed from private sources (that is, from revenues generated at the facility). The apparent intention of this provision was to cease providing federal subsidies for sports facilities when the teams were privately owned. As Senator [Daniel] Patrick Moynihan of New York stated: "Congress intended to eliminate the issuance of tax-exempt bonds to finance professional sports facilities as part of the Tax Reform Act of 1986."

The provision, however, was replete with loopholes that have allowed almost complete circumvention of its intent... The same reasoning applies to naming rights, long-term luxury and club box leases, pouring rights, permanent seat licenses, and so on. Further, if the lease provided that instead of paying rent (which would count toward the limit), the team paid for facility maintenance, then again there would be no offset against the limit. Along with still other loopholes, the 1986 tax reform provision allowed teams to receive ever more favorable leases without rental payments and with less or no sharing of stadium-generated revenues.

Senator Moynihan, cognizant of this irony and concerned about the prospect in the mid- 1990s that New York City might build a $1 billion-plus new stadium for the Yankees, introduced bill S.1880 in June 1996. The bill would have eliminated the tax-exempt financing for professional sports stadiums. The bill did not make it out of committee.

Is there a loophole?

If you read on, you'll see that Zimbalist, in an effort at fairness, makes a suggestion that would seem to have given the OK to tax-exempt bonds for the Yankees and Mets (if not necessarily the plan using PILOTs), both with older stadiums. He wrote:

While it is arguable that there could be a small gain in net global welfare when a team relocates from a smaller to a larger city, it is clear that proper public policy should be oriented toward promoting an increase in the supply of baseball franchises so that all economically viable cities have a team. The best way to accomplish this is discussed shortly. Absent a successful policy to increase the supply of teams, it is appropriate for Congress to take up again the issue of the federal subsidy for stadium construction through the municipal exemption. Stadiums may generate positive externalities, consumer surplus, and public goods benefits for the residents of an area. Similar to a museum or a public park, these externalities might justify a level of public subsidization, even though in the case of a stadium the financial benefits are appropriated privately.

There is, however, no reason for the federal government to subsidize a process that picks one city over another. Thus it would be desirable for a new version of the Moynihan bill to be considered and passed. Moreover, at the end of 2002, nineteen of baseball’s had new stadiums (or stadiums being built) that benefited from the federal tax exemption. The new bill should therefore provide similar treatment for the eleven teams that have not had a stadium built since 1989. Those teams should be grandfathered for a period of up to five years. The principal goal here is to remove this exemption before the next round of stadium construction begins, which, if the past is an indication, should be around 2020.

What about the Nets?

And what about the Nets, who play in an arena that opened in 1981?

Well, maybe Zimbalist's rationale might apply. Then again, there's already a new arena in Newark, isn't there?

Zimbalist on AY

It's worth a look to see how Zimbalist finessed his report on AY:
The FCRC project at Brooklyn’s Atlantic Yards, I believe, distinguishes itself from the standard sports facility project in at least two important ways. First, New York City and New York State will benefit from a recapture of tax revenues presently generated in New Jersey.

The second reason was that it was--at least was projected to be--part of a larger development plan.

But Zimbalist's support for a project that might recapture tax revenues from another state is an argument for local and state support. It says nothing about the burden on federal taxpayers.

What about the Yankees?

Zimbalist notably opposed PILOT financing for the West Side Stadium but supported it for Yankee Stadium. In both cases, in op-eds for the New York Times, he was addressing a second-order question: would tax-exempt financing be paid off by PILOTs or not?

In both cases, he could have simply answered the primary question and opposed tax-exempt financing as bad public policy, given his well-known public stance.

He hasn't been called on it.

Peer review missed Zimbalist

Nor has the Times, as I wrote in May 2007, pursued peer review of Zimbalist's AY study, even though it did ask other scholars to review a study of bias by basketball referees.

There's ample evidence, as pointed out last October, that Zimbalist's AY study was a "promotional" one, the kind he has criticized.

Nevertheless, at the 3/29/07 Congressional hearing on subsidies for sports facilities, Zimbalist's study was uncritically endorsed by ranking minority member Rep. Darrell Issa (R-CA).

1 comment:

  1. I just listened to “sports business expert” Andrew Zimbalist on this morning’s Brian Lehrer Show (on WNYC). I was struck by his dodgy answers to questions while complaining about quotes taken from his past writings and books being used (including by Atlantic Yards Reports) to evaluatively question his current paid promotion of the Nets and the Yankees. (Broadcast at 8:15 and 10:15.- http://www.wnyc.org/shows/bl/episodes/2008/07/14/segments/103362)

    I was most intrigued to hear that he agrees with the widely accepted wisdom of economists respecting sports complex arenas generally, and therefore he believes that the Nets arena on a stand-alone basis will not be an economic plus for New York, and that the potential for justifying the arena as an economic benefit comes by viewing it in tandem with the other non-arena portions of the Atlantic Yards project. (Among other things he said that the arena provided “no independent economic plus”)

    This, of course, raises several issues-

    First, there is clearly a serious likelihood that only the arena portion of the Atlantic Yards project will be completed. That would vitiate the Zimbalist assessment that there is any benefit possible. This comes into play whether Ratner a.) never builds more of the project, b.) delays for a prolonged period before developing it, or c.) builds the rest only when a ransom of additional public subsidies makes it worth his while though not the public’s. -It is good to remember that those with subsidy information, (Ratner and, depending on what they know, ESDC officials enabling him) have not been forthright with information about either a.) the amount of subsidy that will pay for the arena, or b.) the non-arena portion of the project. For instance, will the arena get $1.3 in bonds- Will there be $800 million in triple-tax-exempt bonds? $950 million? $1 billion?- etc.

    Next, while now we are hearing from Zimbalist that the arena is justified by the non-arena portions of the project, in the past haven’t we heard the reverse alleged- that the rest of the project was instead justified by the arena?

    And if the arena is only justified by the rest of the project, then why wouldn’t we be better off building only the rest of the project, and perhaps building more of it as would be possible if the arena was not taking up resources and space (and destroying valuable recently renovated high quality housing)? Perhaps the answer would be that the inordinately generous subsidies to the arena are being captured to subsidize the non-arena portion of the project. But how could that be if neither the subsidies for, nor the public benefit contributions from the non-arena portion of the project have yet been negotiated? How could that be if the subsidy for the arena has not been negotiated? How could this ever be negotiated for the public benefit if public officials are going to cripple themselves by acting as if they have actually bestowed a theoretical monopoly on Ratner for 22 acres of sites to build 17 buildings- All this without competitive bid?

    And if Zimbalist is an expert only on sports businesses and sports complex finance and smart enough to know that there is no economic plus to the arena standing alone, hasn’t he put the question of overall economic benefit into some other economist’s bailiwick to answer when he says that the benefit must come from the non-arena portions of the megadevelopment? Am I not then better at answering the question given my more than quarter century of experience in the distribution of New York housing subsidies and my urban planning degree? If you ask me, I will tell you that, whether the non-arena portion of the project is highly subsidized or lightly subsidized with housing and other subsidies, it will be a net negative for the Borough of Brooklyn and City of New York.

    Another thing that Zimbalist leaves out of his equation is this: It is not whether an economic benefit can be found when evaluating the project. The question is how does that economic benefit compare with the benefit that would be achieved if available public resources were alternatively invested? - -

    - - For instance, this Atlantic Yards Report post mentions prominently the role of Senator Daniel Patrick Moynihan in restricting and making illegal the use of triple-tax-exempt financing for sport complexes. Ironically, Moynihan also importantly promoted one of the projects which stands to be the most beneficial for New York City and that project is now on the ropes partly because resources are being misdirected into Atlantic Yards. The Moynihan Station project will cost substantially less money than Atlantic Yards while providing substantially more benefit but the New York Times reported that it is in trouble (“Plan to Rebuild Penn Station Area May Be Close to Failure” by Charles V. Bagli, February 23, 2008). Only a portion of the taxpayer dollars going into Atlantic Yards, say perhaps only the $165 million being siphoned off from the federal treasury- would be enough to save it.

    - - Alternatively, if the arena was not built then recently renovated and extremely valuable tax-paying properties would remain on the tax rolls. These buildings, not over the rail yards, are already existing and would have to be torn down for the arena to be built. At the same time, additional housing and tax-paying properties could be built as infill and atop the portion of the rail yards where the arena is to be built. Since these properties would not have the same traffic surge problems they would make better use of the existing mass transit infrastructure (among other things not over-burdening the systems that serve Brooklyn Heights, Park Slope, and so much else of Brooklyn.)

    - - Without the arena there would be no reason to divert monies from the MTA with Ratner’s below-market acquisition of Vanderbilt Yards. How much would a properly structured bid bring in to pay for subway ridership? Another $250 million? More? (See: Friday, June 27, 2008
    No-property-tax status was supposed to raise the price of the Vanderbilt Yard http://atlanticyardsreport.blogspot.com/2008/06/no-property-tax-status-was-supposed-to.html ) Shouldn’t residential growth go hand in hand with expansion of mass transit capacity rather than being subsidized to burden it?

    If the arena, subsidized with approximately $1.3 billion in taxpayer money (perhaps around half of what the total taxpayer subsidy the overall megadevelopment will get), is not a net economic plus, then the rest of the $4.4 billion project will have to provide some truly extraordinary public benefit in order to justify not only itself (as against other alternatives) but also the huge additional cost of the megadevelopment when the arena is included in it. With that handicap, how could the megadevelopment ever be considered the best use of resources over the more beneficial alternatives that exist?

    - - - - -

    On a separate matter I should note that Zimbalist was not correct when he said that the Yankees were themselves “financing” the tax exempt bonds when R-TIFC-PILOT Agreement supported bonds are used. I disagree with him when he says that these intercepted “payments in lieu of taxes”are not in lieu of taxes that would be paid. (And note also that the alternative scenarios above do involve taxes that would be paid.) Lastly, his suggestion that New Yorkers who pay federal taxes and receive federal services should not oppose the sacking of the federal treasury as if we are not federal citizens seems bad advice. Should New Yorkers never attend the federal TEFRA hearings to consider whether federal tax-exempt bonds should be issued? I also consider bad advice his related suggestion that we should consider that there is no relationship between Albany and federal politics when sorting out what should be done with respect to a megadevelopment funded at all levels of government.

    Michael D. D. White
    Noticing New York

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