Wednesday, September 17, 2008

In Brodsky’s report slamming Yankee Stadium deal, major questions implied about Atlantic Yards arena plan

Westchester Assemblyman Richard Brodsky yesterday released a report, The House That You Built (PDF), slamming the city on multiple grounds for its management of the Yankee Stadium deal, suggesting the willingness to grant tax-exempt bonds was based on an empty threat--a vague report, backed up without direct evidence, that the Yankees would leave the media capital of New York City for a stadium elsewhere.

Brodsky’s charges drew a fierce rebuttal from the city, which not coincidentally, was followed by an announcement that Seth Pinsky, president of the New York City Economic Development Corporation and the only witness at a contentious July 2 Assembly hearing called by Brodsky’s Committee on Corporations, Commissions and Authorities, had withdrawn from a planned appearance at a Congressional hearing tomorrow on the Yankees deal.

No other city official will take his place. "We have informed the congressman [Dennis Kucinich] that it will not work for us," Pinsky said, according to the New York Sun. "But we remain happy to speak to him about this subject." (Doesn’t Congress have subpoena power?) Nor will the Yankees testify.

AY implications

The absence of any city representative suggests that Kucinich’s committee will have trouble publicly exploring the parallels between the Yankees deal and that planned for the Atlantic Yards arena. While Brodsky’s report doesn’t mention Atlantic Yards, it raises significant questions about the arena deal, notably whether taxpayers are paying for construction and whether the city is willing to manipulate the arena tax assessment to meet requirements for tax-exempt bonds.

In the case of the Yankees, according to Brodsky's report, the city relied "without independent inquiry" on stadium costs supplied by a Goldman Sachs banker--the same banker working on the arena deal.

Indeed, Brodsky’s report states unequivocally that the stadium financing deal, based on PILOTs (payments in lieu of taxes), means that the public, not the team, is paying for the new Yankee Stadium--a highly contentious charge, and one made by Atlantic Yards critics regarding the planned arena. (I've said it's arguable.)

I asked Brodsky if he believes there's any essential difference between the PILOT deal for the Yankees and the PILOT deal planned for the Atlantic Yards arena. His response: "Having not looked at the Ratner Deal in any detail, it would be pure speculation to come to any conclusion."

(He did say, according to the AP, that concerns about subsidies for private businesses without direct benefit to the public could also apply to proposals to help the New York Mets build a new stadium and for a Nets basketball arena in Brooklyn.)

Perhaps more importantly, Brodsky’s report suggests--as has already been reported--a concerted attempt to “game” the assessed valuation of Yankee Stadium to ensure a total high enough for the PILOTs associated with the Yankees bond deal. The machinations by the New York City Department of Finance (NYC DOF), criticized in withering detail in the report, may have been repeated for the Atlantic Yards arena, though no information has surfaced.

More bonds?

Kucinich’s committee is likely looking into this issue. For now, the city is waiting to see if the Internal Revenue Service (IRS) will grandfather in requests by the Yankees and Mets for additional tax-exempt bonds, and the Forest City Ratner request for tax-exempt arena bonds, applying the older, more lenient rule. The agency has proposed a change that would invalidate the old rule and Kucinich has called for a moratorium until his committee finishes its work.

Brodsky's report points out that, given the Yankees' non-relocation agreement, "there is absolutely no basis for a new threat to leave," thus undermining a request for additional bonds.

City response

The city and Brodsky disagree enormously on how many jobs were created by the Yankee Stadium deal and, more importantly for the Atlantic Yards debate, what PILOTs actually mean. According to Newsday, Pinsky said Brodsky "doesn't understand" or was "willfully ignoring the fact" that private money is paying the construction costs.

In a statement issued by his office that did not respond point by point, Pinsky said, "I'd like to think that Assembly Member Brodsky is simply misinformed, but after all of the public hearings, questions and analysis, it is becoming increasingly difficult to explain his blatant and fundamental errors and omissions.”

“While finding ways to bring jobs and private investment to the South Bronx, we’ve been working closely with elected officials who represent the South Bronx, not those who simply stop by for press conferences,” he added. “In these difficult economic times, the last thing the Assembly should want to do is trash billion-dollar private investments that will employ thousands of hard-working New Yorkers and generate tens of millions of dollars in new tax revenues for the City and State."

I’ll go through Brodsky’s findings one by one.

No economic impact?

1) The New Stadium Will Not Create Any Significant New Permanent Employment or Economic Activity

The $500 million to $1 billion in public subsidies, the report states, will create few jobs or benefits; the report cites Brooklyn-based writer Neil DeMause, co-author of Field of Schemes, on the limited impacts of sports facilities. Notably, Brodsky says, in the letter required to have the New York City Industrial Development Authority (NYC IDA) deviate from its policy that requires a certain amount of economic benefit for bonds it issues, “the sole reason given in support of public financing was a purported Yankee threat to relocate out of the City. There is no evidence that the Yankees actually made such a threat.”

Brodsky and the city/Yankees disagree significantly with the numbers about new jobs, with Brodsky saying it's a handful and the city/team responding that it's over 1000. Note that, because the Atlantic Yards arena would shift a team from another state, the sports facility would likely bring more jobs. Still, it’s unclear how many; the 453 arena jobs would be subject to union rules and may be filled with current employees now in New Jersey. (I estimated 60% new jobs: 272.) While the tax-exempt arena bonds wouldn't support the rest of Atlantic Yards, city officials justify the project, in part, on the grounds that other elements of AY would bring jobs.

Is the public paying?

2) The Public, Not The Yankees, Is Paying The Cost of Constructing The New Yankee Stadium.

Perhaps most controversial is this charge:
Taxpayers are paying the cost of constructing the new Yankee Stadium despite repeated claims to the contrary by City officials: “Funding for the $800 million in construction costs is being provided fully by the Yankees.” These statements are simply not true. The cost of construction is being paid by diverting tax payments the Yankees are legally obligated to make to New York City to repayment of the tax-exempt bonds floated by the NYCIDA. The City repeatedly in legal documents admits that it is taxpayer money, not Yankee money, which is building the new Stadium. “The City has determined to use its property taxes (in this case PILOTs) to finance the construction and operation…of the Stadium.


This is a fascinating argument, because, in the request to the Internal Revenue Service for a Private Letter Ruling (PLR) endorsing the Yankee deal, lawyers working for the city did say the above. On the other hand, in 2006 testimony on Yankee Stadium, the Independent Budget Office (IBO) more narrowly noted that land at issue is tax-exempt:
Because there is no loss of current revenue, IBO does not include the value of the exemption as a cost to the city.


In its September 2005 Fiscal Brief on Atlantic Yards, IBO also said:
Although FCRC will make what the Memorandum of Understanding refers to as PILOT payments to the LDC, these payments are not the equivalent of city property tax payments. Instead they will cover the construction costs for the arena in the first 30 years—and some arena maintenance if the PILOTs exceed debt service. In a more conventional development model, a developer would need to make both construction financing payments and property tax payments for any property tax liability remaining after applying available abatements and exemptions…

IBO’s estimate of new property tax revenue lost to the arena PILOT does not include a loss of property taxes for the MTA land that would be part of the arena building foot print. The city currently receives no tax payment from the MTA for the rail yard because the MTA, like other state entities, is exempt from local property tax. Under the MTA’s Request for Proposals, any developer acquiring the development rights to the site would probably enter into a long-term lease, leaving the MTA in place as the owner. Therefore, the property would likely remain off the city’s tax roll, resulting in no impact on the city budget. Indeed, the MTA has an incentive to make a deal that maintains the tax exemption in order to maximize the price it receives for the development rights.


But, as I wrote, the MTA did not do so.

The IBO did point out that such financing arrangements represent a loss of resources, given the limited allocation of tax exempt private activity bonding authority available to each state for residential and other economic development projects.

Regarding Yankee Stadium, Pinsky defended the federal subsidy (described as $120.2 million but now perhaps 50% more), the New York Observer reported last year:
“Tax-exempt financing provides a largely federal subsidy to a project that will bring important benefits to an underserved part of the city,” Mr. Pinsky said via e-mail. “This subsidy, which is permissible under IRS regulations, is one that makes sense for the city to leverage--especially given its status as a substantial contributor to the U.S. Treasury


Failure to disclose?

3) The Actions Of The NYCIDA Did Not Protect The Public Interest, And May Have Violated The Law.

Brodsky’s report charges:
The NYCIDA manipulated and evaded State law requirements that there be a public economic benefit in exchange for the massive public subsidies received by the Yankees... The state law which governs NYCIDA actions should be amended to end these abuses, to require broader disclosure of key elements of its projects, to assure a real public benefit in exchange for public subsidies, to end the abuse of the UTEP process through “deviation letters”, and to limit the unfettered and explosive growth in NYCIDA sponsored public debt.

Too much public debt

4) The NYCIDA Should Not Be Used For The Creation Of Massive Amounts Of Public Debt. Such Use May Violate Existing Law.

The issuance of PILOTs, to be paid off by public authorities and Local Development Corporations, creates “billions of dollars of new public debt with little transparency or control by elected officials and outside of existing debt restrictions.”

The report charges:
The securitization of PILOTs as a new way to create unrestricted public debt may not be legal. The Mayor’s original assertion that he could create such debt through these new entities without legislative approval was clearly beyond the law. Whether or not the City Council's actions cured that defect in City actions is unclear. Whether or not state law permits such machinations is also unclear should be examined. If state law does permit such debt issuance it should be amended to contain reasonable standards protecting the public interest and procedures to assure transparency and fairness.


That has major implications for Atlantic Yards.

Ticket prices

5) The NYCIDA’s Refusal To Consider The Issues Of Ticket Prices And Public Access To The New Yankee Stadium Was A Failure To Protect The Public Interest.

“The Yankees right to charge any price they wish for tickets ended when they sought and received public subsidies,” the report states--a charge that raises questions about what exactly is standard practice around the country. This also has implications for the Atlantic Yards arena.

Tax assessment practices

6) The Tax Assessment Practices of DOF, For Yankee Stadium And Elsewhere, Need Immediate Independent Review.

This is probably the most significant charge. The report states:
The NYCDOF inflated the assessed value of the new Yankee Stadium despite sworn promises by New York City that it would not. It did so, in all probability, to qualify the Stadium project for tax exemptions. The decisions and actions by DOF with respect to its assessment of the land and facility at Yankee Stadium are disturbing, and may have violated legal requirements.... The consequence of these actions is an assessed value for the Yankee Stadium project that is inflated by as much as one-third.

An immediate, thorough, and independent review of this assessment, and assessments elsewhere in the Stadium neighborhood, and perhaps elsewhere in the City, is required.


That suggests a look at Atlantic Yards.

Other charges

7) New York City’s Acquisition Of A Luxury Suite And Yankee Tickets Was, At Best, Unwise.

8) There Is An Immediate Need For Thorough, Independent Reviews Of The Actions OF DOF, NYCIDA, And Other Public And Private Parties.

Tensions with city

Brodsky’s report suggests significant tension:
The NYCIDA produced voluminous documents with unfailing courtesy. It is unclear if all requested information was produced however. The DOF produced some documents. It is likely that all information requested has not been produced. The Committee is pursuing those documents.


The size of the PILOTs

Brodsky’s report goes into considerable detail on the size of the PILOTs:
However, the City argued that as long as the PILOT payments were not in excess of the real property taxes otherwise owed by the Yankees, the tests were met and the IRS should approve the tax exemption for the bonds. In other words, the IRS should not object to the use of PILOTs to pay off tax-exempt bonds floated to build the Stadium, if the PILOT payments were not artificially inflated to meet the debt service requirements. Again, if $50 million was needed annually to pay off the bondholders, but actual property taxes or PILOT payments generated only $30 million, the local government could not artificially raise the tax or PILOT payment the additional $20 million a year, even with the permission of the taxpayer.

If DOF, however, had artificially inflated the assessed value, the entire legal justification for the tax-exemption collapses and the tax exemption would be denied. It is noteworthy that this concern was publicly discussed. The New York City IBO specifically raised the issue in testimony by the New York City Council: “Given the large annual payments needed to service…tax exempt bonds…a regular property tax bill would be…considerably below the annual debt service payments.”1

This warning was ignored by the City, the IRS, the Yankees, and the lawyers for all parties.


Implications for AY

As I've written, Forest City Ratner expects an $800 million tax-exempt bond issue, which, by my estimation, would save the developer $165 million. Based on the example of the Yankee Stadium bonds, an $800 million bond issue would require $48 million in annual payments. 



However, foregone property taxes for Madison Square Garden, which the Independent Budget Office considers more valuable property than the expected arena in Brooklyn, are only $12 million a year.

Valuation questions

The report states:
The heart of the IRS policy is to stop manipulation of property taxes for the purpose of receiving tax exempt financing. In other words, if the Yankees were treated as any ordinary taxpayer would be treated, the bonds could be approved. There was intense and voluminous correspondence between the IRS and the NYCIDA, Yankees, and others largely responding to IRS concerns. The NYCIDA swore to the IRS that the Yankees would be so treated and that the annual PILOT would be “commensurate” with the actual property tax liability of the Yankees to New York City, and, in a key assurance by the NYCIDA, that the New York City Department of Finance, which sets the assessed value for each parcel in the City, would assess the property in accordance with normal and accepted procedures.

In a July 3, 2006 letter to the IRS, NYCIDA counsel asserted that “…the New York City Department of Finance (“Finance”), the City agency that is responsible for assessing any property located in the City subject to real property tax, will use the same assessment method for the Stadium is (sic) used for assessing properties of the same class within the City...In other words, the City’s use of the actual assessed value, equalization rate, and tax rates…results in that PILOT being commensurate with the applicable real property tax.” The NYCIDA was legally obligated to make sure that the Yankee Stadium property was assessed as every other such property is assessed, and to apply the same tax rate applied to any other such property, and to not artificially inflate the tax payments. It did not keep that commitment, the DOF assessment was inflated, and the IRS was never informed.


The report states that DOF chose to use eight “comparable” parcels from Manhattan, where real estate values are significantly higher, and none in the Bronx. In fact, despite the city’s claim that Harlem was similar to the South Bronx, DOF used parcels in Chelsea and the Lower East Side.

Moreover, though DOF makes “customary adjustments for location, size and time,” in this case, “in violation of its own standard practices, [DOF] made only those adjustments which increased value and failed to make the adjustments which would have decreased value. When asked, DOF had no explanation for this decision. The effect of these decisions was to substantially inflate the assessed value of the Stadium land.

The report adds:
The City did two other appraisals of the Stadium land, both of which dramatically contradict the DOF assessment, and both of which were withheld from the IRS, state and Federal officials, and the public.


The role of Goldman Sachs

The report cites the role of Gregory Carey, the Goldman Sachs banker who is also working on the Atlantic Yards arena deal:
On April 10, 2006 DOF announced that the assessed value of the Stadium itself was $1,025, 283,187. This figure was the total of hard costs of $749,396,309 and soft costs of $275,886,878. These numbers were supplied in a letter to DOF Assistant Commissioner Dara Ottley-Brown in a February 27, 2006 letter from Mr. Gregory Carey, a senior member of Goldman, Sachs & Co. DOF admits it accepted without independent inquiry Mr. Carey’s assertion of Stadium costs....

First, it is not customary assessment practice to receive and accept such cost numbers from financial advisors to a taxpayer, without verification or inquiry...

Second, various categories of cost asserted by the Yankees and accepted by DOF seem unusual in both their nature and their value...

Third, the same concern is raised by the inclusion in real property value of $53 million for “Luxury/Sky/ Boxes”...

Fourth, it appears that the Yankees included two similar categories of cost, $36 million for “Escalation”, and $34 million for “Project Contingency”...

Fifth, certain soft costs seem unusually high...

Sixth, it appears that the Yankees included costs for the construction of property not legally part of the Stadium, particularly the cost of construction of a new police station...

These matters are highly technical, and no definitive conclusion on the legality or propriety of any individual cost can now be reached... The Committee has been told they have received all documents in the file, and concludes that in the absence of any documents clarifying these decisions, having sought expert opinion on these matters, and based on its own understanding of the law and accepted assessment practice, there is a need for further investigation of the actions of DOF in assessing the Stadium facility.


Who’s in charge?

The report suggests these deals are not subject to sufficient democratic oversight, an issue Brodsky’s committee has repeatedly pursued:
As a matter of law, the decision to provide billions of dollars of public financial assistance to the Yankees was made by the NYCIDA Board, whose current members are: Seth Pinsky, Derek Park, Amanda M. Burden, Michael A. Cardozo, Albert V. De Leon, Steven C. Devereaux, Robert C. Lieber, Joseph I. Douek, Kevin Doyle, Andrea Feirstein, Bernard Haber, Albert M. Rodriguez, Robert D. Santos, William C. Thompson. With all due respect to these public-spirited and well-intentioned citizens and government employees, it is unlikely many New Yorkers have heard of them, or wish them to be vested with the enormous power they now wield.

When asked about this issue, Mr. Pinsky replied that only the Mayor of New York City needed to be involved in such decisions:

Chairman Brodsky: Does it seem to you that this is a matter of such public importance that elected officials ought to be driving the decision?

Mr. Pinsky: Like the mayor, sure.

Chairman Brodsky: Other than the mayor, are there any elected officials worthy of participation in this?

Mr. Pinsky: No.

In fact, the decision to go forward with the Yankee deal was largely the decision of the Mayor, and the NYCIDA admitted as much. In a June 30, 2006 letter to the IRS, Mitchell Rapaport and Bruce Serchuk (of Nixon Peabody LLP), counsel to the NYCIDA explicitly admitted that the deal was not in the control of the NYCIDA, but had been “negotiated with the City,” apparently meaning the Mayor.

It is not in the public interest for the decision to issue billions in public debt to be made purely by the executive, outside the constitutional system of checks and balances. The State Legislature, the City Council, and others concerned about the governance of public institutions, and the proliferation of public debt, need to address these complicated, formal and informal, executive driven, and secretive institutional arrangements. One can hardly expect enormously wealthy private entities such as the Yankees to avoid the riches showered on them by these deals if elected officials themselves do not examine and control them.

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