Saturday, July 26, 2008

Was Yankee Stadium value "gamed" to issue PILOTs? Congressional probe could affect AY

Was the valuation of the new Yankee Stadium "gamed" so that the foregone taxes exceeded the expected bond payments, thus allowing a PILOT (payment in lieu of taxes) financing deal?

That's the subtext of the inquiry launched yesterday by the Domestic Policy Subcommittee of the House Oversight and Government Reform Committee, which in March 2007 and October 2007 held hearings regarding tax-exempt financing for sports facilities.

And should the subcommittee, chaired by Rep. Dennis Kucinich (D-OH), find the procedures sketchy, that could cast doubt on similar financing plans for Atlantic Yards arena and the new Mets stadium.

In yesterday's letter, Kucinich was not questioning the use of fixed PILOTs, which would be forbidden under proposed federal regulations, just whether the city and others are cooking the numbers to make a deal with fixed PILOTs work. (Here's coverage from Reuters.)

Drilling down

The subcommittee is investigating the accuracy of representations made to federal agencies and bond investors about the property value of the land and buildings in the stadium construction project.

Kucinich yesterday sent letters to the New York Yankees, the New York City Department of Finance, New York City Economic Development Corporation, Internal Revenue Service, and National Park Service, asking for "all documents relating to any assessment, appraisal, or any other valuation, estimated or final, of the new Yankee Stadium and the land on which the stadium is being built, including the methodologies by which these valuations were calculated."

Fishy numbers?

As I wrote June 27, the city's Independent Budget Office (IBO) certainly thought the annual Yankees PILOT might exceed the foregone taxes and thus render the deal questionable. However, according to a 5/8/08 letter to the IRS and Treasury Department from city and state agencies, the estimated tax for the Yankees would be $62.5 million, while the PILOTs would be only $56.7 million.

But where did those numbers come from? The source for that estimate is not a city agency but a report from Moody's Investors Service, a company that offers credit rating and risk analysis.

No estimate for the Atlantic Yards arena PILOTs was given. However the IBO estimate of $11 million in foregone property taxes for Madison Square Garden would be far less than the estimated $48 million annual payment for $800 million in tax-exempt bonds for the arena. Develop Don't Destroy Brooklyn has raised this point with the IRS and Treasury Department.

At stake for developer Forest City Ratner is a savings of perhaps $165 million compared with taxable bonds. Federal taxpayers bear most of the burden; hence, the backing of the plan by the city and state.

Several levels of concern

Kucinich may personally oppose tax-exempt financing, but eliminating it is politically unlikely. Still, both Congress and federal agencies can on several levels make things difficult for backers of tax-exempt bonds for sports facilities.

First, Kucinich has questioned whether the PILOT deals for the Yankees and Mets should have gone through. In June, he published a letter questioning whether the IRS’s approval of the teams’ financing arrangements was permissible, let alone compelled, as the IRS Chief Counsel had testified.

He asked for clarification of testimony on the issue before the Treasury Department finalizes new rules that would permit a version of such financing.

New rules opposed by city and state

Second, even though Kucinich has questioned the proposed rules, they would remove what the IRS Chief Counsel called a "loophole" and make it impossible to issued fixed PILOTs, but rather make sure they fluctuate, as do regular property taxes.

The city and state are lobbying to make sure that additional bonds for the Yankees and Mets stadiums, as well as bonds for the Atlantic Yards arena, are grandfathered in under the more lenient standard, which allowed fixed PILOTs. As Neil deMause explained on Field of Schemes, bond buyers look askance at PILOT payments pegged to floating annual property assessments, since they "really really don't like uncertainty in their bond payments."

Holding the city and state to the PILOTs deal

Third, as noted above, Kucinich in the letters issued yesterday did not question the concept of fixed PILOTs, just whether the numbers behind them are fishy.

At the Assembly hearing

There are several reasons to question the numbers, including the IBO report and discussion at a State Assembly hearing July 2. At the hearing, Assemblyman Richard Brodsky grilled Seth Pinsky, head of the New York City Industrial Development Authority, about the assessment for the new Yankee Stadium.

Pinsky said he didn’t know the methodology, but said the IRS had given its blessing.

“I believe the IRS accepted the numbers given without examination,” Brodsky responded.

Pinsky said that the bond buyers and rating agencies and associated law firms had vouched for the numbers.

“We’re going to take a much harder look at that,” Brodsky said.

It looks like Congress will be part of that "much harder look."

1 comment:

  1. I learned with the back and forth that went on when Rich Calder was writing his New York Post article, “YOUR 'NET' LOSS, $2B IN TAXES TO RATNER” April 14, 2008
    http://www.nypost.com/seven/04142008/news/regionalnews/your_net_loss_106461.htm?page=0

    that while Ratner and his people are desperately interested in the public not knowing how much subsidy he is trying to glom onto (even as he demands more of it) Ratner is also dedicated to having those things like the amount of taxes he might be paying shift back and forth to be exactly whatever he wants them to be at any particular point. Ratner and his people seemed willing to argue that taxes might be taxes if they “wanted” to pay them and not be taxes if they chose not to because of exemptions. In this regard, the Ratner relationship with taxes seems much like the relationship Alice finds Humpty Dumpty considers he has with words-

    Consider their Alice’s and HD’s exchange-

    “I don't know what you mean by "glory",' Alice said.
    Humpty Dumpty smiled contemptuously. `Of course you don't -- till I tell you. I meant "there's a nice knock-down argument for you!"'
    `But "glory" doesn't mean "a nice knock-down argument",' Alice objected.
    `When I use a word,' Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean -- neither more nor less.'
    `The question is,' said Alice, `whether you can make words mean so many different things.'
    `The question is,' said Humpty Dumpty, `which is to be master -- that's all.'
    Alice was too much puzzled to say anything; so after a minute Humpty Dumpty began again. `They've a temper, some of them -- particularly verbs: they're the proudest -- adjectives you can do anything with, but not verbs -- however, I can manage the whole lot of them! Impenetrability! That's what I say!'
    `Would you tell me please,' said Alice, `what that means?'
    `Now you talk like a reasonable child,' said Humpty Dumpty, looking very much pleased. `I meant by "impenetrability" that we've had enough of that subject, and it would be just as well if you'd mention what you mean to do next, as I suppose you don't mean to stop here all the rest of your life.'
    `That's a great deal to make one word mean,' Alice said in a thoughtful tone.
    `When I make a word do a lot of work like that,' said Humpty Dumpty, `I always pay it extra.'”

    Do the Ratner people, like Humpty Dumpty believe that because they might “always pay extra” that they are entitled to have the IRS, other public officials, bond buyers, rating agencies and law firms accept and vouch for numbers without examination?

    How “Slithy!”

    Michael D. D. White
    Noticing New York
    http://noticingnewyork.blogspot.com/

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