Tuesday, July 01, 2008

Some questions for the Assembly hearing tomorrow on Yankees' tax-exempt financing (and what about the Nets?)

On Wednesday morning, the Assembly Standing Committee on Corporations, Authorities and Commissions, chaired by Assemblyman Richard Brodsky, along with three other committees, will hold a joint hearing in Manhattan in order to look into "the request for increased public financing for construction of a new Yankee Stadium in New York City."

While a focus on the Yankees is understandable, an exclusive focus is curious, given that less than three weeks ago Brodsky issued a press release stating that the hearing would examine the New York City Industrial Development Authority's "practices and procedures for issuance of public debt with respect to sports facilities for the Yankees, Mets and Nets."

I asked Brodsky's office about the narrowing of focus; when I get a response I'll publish it.

Even if the hearing does not specifically address Forest City Ratner's expected request for $800 million in tax-exempt financing (though DDDB assumes it would), any scrutiny of the city agency's effort to get a "loophole" grandfathered in for the Yankees seemingly would apply equally to sports facilities sought by the Mets and the Nets.

Questions about tax estimates

There are numerous questions (here, here, and here) worth asking about the city/state letter to federal regulators regarding Atlantic Yards. But let's stick to the Yankees for now.

The city's Independent Budget Office thought the annual Yankees PILOT (payment in lieu of taxes) might exceed the foregone property taxes, which would run afoul even of the "loophole" allowing tax-exempt financing.

Yet the numbers, according to a letter from the city and state, work out. The estimated property taxes are attributed to the research firm Moody's, not any city agency. Let's hope those at the committee hearing ask a little more about how those estimates were generated; after all, I never got a response from the New York City Industrial Development Authority when I asked.

Neil deMause reported 4/10/06 on Field of Schemes:
Asked what happens if the assessed value ultimately comes in below the city's projections, city Economic Development Corporation chief Andrew Alper replied, "I'm not sure what would happen to the debt," which is hardly reassuring.

...Mostly, though, it was a day for confusion, as councilmembers with only the dimmest grasp of economics tried to figure out how the Yankees' payments could be both "tax money" and a private contribution. As the IBO's Lowenstein explained it: "Part of what makes this so difficult to get your mind around is that these guys aren't paying property taxes now, but we're structuring something to look like a property tax so that it meets the Internal Revenue Service code test that allows them to do the tax-exempt financing."

Questions about a contradiction

To pursue the tax-exempt bond deals, PILOTs must be considered the equivalent of taxes, but the city hasn't always gotten its story straight. The July 2007 Good Jobs New York report Insider Baseball (PDF) points to a contradiction that those at the committee hearing should address:
City lawyers submitted a request to the IRS for a special ruling allowing payments-in-lieu-of taxes (or “PILOTs”) to be considered the legal equivalent of taxes for the purpose of servicing the bond debt and providing the Yankees with tax-free bonds. This argument contradicted statements made by the New York City Corporation Counsel as well as the City’s Budget Director in testimony before the City Council in spring, 2005 when they outlined financing for the massive development proposed for Manhattan’s Far West Side.

Let's go to the footnotes. The architects of the special ruling, the law firm Nixon Peabody, crowed in an 8/24/06 press release:
The deals ensure that future generations of New Yorkers will be able to cheer their favorite teams in new stadiums without increasing taxes, thanks to a first of its kind financing structure conceived of and developed by Nixon Peabody.

The structure allowed both stadiums to be financed primarily on a tax-exempt basis through the issuance of bonds supported solely by negotiated payments (in lieu of taxes) to be made by affiliates of the teams. To develop this innovative structure, the firm prepared and successfully obtained two separate private letter rulings from the Internal Revenue Service on behalf of the New York City Industrial Development Agency (NYCIDA). As a result, the Yankees and the Mets have on a combined basis saved in excess of $200 million in financing costs.


Those numbers would be higher if the teams successfully get more tax-exempt financing. I've suggested that Forest City Ratner might save $165 million on the Atlantic Yards arena.

Some questionable statements

By contrast, Good Jobs New York points to excerpts of statements made more than a year earlier by Corporation Counsel Michael Cardozo and Budget Director Mark Page before the City Council Finance Committee in Spring, 2005 regarding PILOTs.

Michael Cardozo, Corporation Counsel (4/25/05):
The sponsors' apparent basis for Intro. 584 is the argument that no revenue of the City may be expended without appropriation. This is generally true to the extent that such monies are "revenues of the City," paid into the general fund.

However, as I have explained, contractual rights to receive PILOTs in the future, directed by the Mayor pursuant to economic development agreements, are not "revenues of the city." They are instead contract rights that can be transferred or otherwise disposed of by the Mayor……

The right to receive PILOT payments are contract rights, not revenue, and they are therefore not subject to payment into the general fund and subsequent appropriation.


Mark Page, Director of the OMB (3/22/05):
However, the concept that this money is the equivalent of tax money in terms of the treatment of the revenue and the role of the Council is something that I am advised is not true, at least in the way contemplated by this local legislation and that's I guess not a great surprise to me in terms of how money paid under these contracts has been used in the past.

Here's more from Field of Schemes

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