Testy Kucinich presses city officials on “gaming” Yankee Stadium assessment; big disagreement over “smoking gun”

During a charged but inconclusive Congressional subcommittee hearing yesterday, a sometimes testy Rep. Dennis Kucinich pressed officials from the New York City Department of Finance (DOF) and New York City Industrial Development Authority (IDA) on how and why an assessment for the land under Yankee Stadium leaped sixfold in a day.

The officials stood their ground during the three-hour hearing, insisting implacably that nothing untoward had gone on, even as a fellow witness, New York Assemblyman Richard Brodsky, periodically expressed disbelief at their testimony.

(From left: Brodsky, Department of Finance Commissioner Martha Stark, Industrial Development Authority President Seth Pinsky; and New York Yankees President Randy Levine.)

While the hearing proceeded under the conclusory title, “Gaming the Tax Code,” and Brodsky and Kucinich walked in convinced of exactly that, the only “gaming” that clearly occurred was accomplished by the city and the Yankees, given that, as a frustrated Kucinich pointed out, they have failed to release 70% of the documents requested and released some key information his committee had requested only on Wednesday, after the Treasury Department had released new rules on PILOTs (payments in lieu of taxes), rendering the subcommittee’s investigation partially moot.

Kucinich, chairman of the Domestic Policy Subcommittee of the House Oversight and Government Reform Committee, had asked the Treasury department to not issue new regulations until the subcommittee completed its investigation, but was rebuffed. The new regulations grandfather in three projects--stadiums for the Yankees and Mets, and the planned Atlantic Yards arena--under looser rules that allow fixed PILOTs. (Floating PILOTs would be much harder to sell in the bond market.)

While Kucinich and Brodsky expressed exasperation, Yankees President Randy Levine presented a sly dig at the Congressman and a more forceful criticism of the Assemblyman, and DOF head Martha Stark, who seemed unflappable, also snuck in some digs at Brodsky.

The latter (right), who didn't get as much chance as he clearly wanted to rebut the testimony of Stark and IDA head Seth Pinsky, declared that "the documents that the Chairman read into the record are a smoking gun."

"In the end the evidence that the assessment of Yankee Stadium was cooked was overwhelming,” he said, later adding, "At some point, if we’re in an evidentiary hearing, where there’s cross-examination, I am confident we could carry the day." Indeed, while the city officials stood their ground well, their explanation of why parcels on the Lower East Side were chosen as comparables for the assessment remains vulnerable. (Here's coverage of Brodsky's prior report and hearing.)

The AY implication

The hearing aimed to examine whether city officials improperly reported to the Internal Revenue Service and prospective bond purchasers inflated values for land and buildings in order to secure more tax-exempt bonds for the construction of a new Yankee stadium. City officials said no, that in part the value was related to the cost of the expensive new building--but they couldn’t fully defend using comparable assessments from as far away as Alphabet City in Manhattan.

Atlantic Yards was hardly mentioned, but IDA head Seth Pinsky emphasized that city and state officials considered the new regulations more important to get the arena built than to get additional bonds for the two baseball stadiums, which are already under construction.

While I and others have expressed skepticism that the planned PILOTs to build the arena would be insufficient to pay the bond, given that the foregone taxes would have to be high enough to offset bond payments for a structure costing nearly $1 billion, the Yankee Stadium example seems to ensure that the PILOTs will work. In essence, the more expensive the building, the higher the underlying land value, and thus the higher the PILOTs.

Kucinich pledged to continue his investigation, so the implications of that strategy likely will be tested.

(Other coverage from Neil DeMause on the Village Voice blog; the New York Times, the Observer, Newsday, the Daily News, and the AP.)

Kucinich weighs in

In his opening statement, Kucinich pointed out that, as shown in previous hearings, “the practice of providing taxpayer subsidies to the building of sports stadiums is a transfer of wealth from the many taxpayers to the few wealthy owners. The new Yankee Stadium is no exception to the rule. Here, not only are city and state taxpayers are on the hook for expensive infrastructure improvements provided for the Yankees, but also federal taxpayers are deprived of hundreds of millions of dollars of tax revenues because the bondholders will pay no federal taxes on the $950 million of bonds issued to construct the stadium.”

He said that the Yankees and the city declined to testify at the Subcommittee’s hearing last month, “because they argued it was unfair to proceed before the Subcommittee could complete its investigation with the benefit of documents on the issue. No matter that the Yankees and City had withheld precisely these documents from the Subcommittee for two months.”

Kucinich charged that the “the timing and apparent coordination of the Yankees’ and City’s actions seem aimed to facilitate a favorable decision from the Treasury Department on their request to have City projects grandfathered from new regulation that proposed to close what the Treasury termed the PILOT ‘loophole.’ They got their wish.... The Yankees’ and City’s continued attempts to stymie this investigation is evidence that they don’t want to the truth to come out.”

He noted that the City is claiming attorney-client privilege in not releasing communications requested--but that privilege has never been binding on Congress.

Inflation of assessment

While subcommittee staff “has uncovered a litany of serious questions about all aspects of the $1.229 billion stadium assessment,” Kucinich said the hearing would “focus on what appears to be the most clear and egregious inaccuracies in the assessment: the possible inflation of the stadium site assessment.”

“From evidence that Subcommittee staff has reviewed, it has become clear that from the very beginning of the assessment process top City officials made it known to the Department of Finance (DOF) that they should be mindful of the Yankees’ interest ‘in seeing that the assessed valuation [would] be high enough to generate as much PILOT for tax-exempt debt as is lawful and appropriate.’ And DOF buckled.”

Whether and how that exactly happened was a matter of much debate during the hearing. Kucinich noted that, on March 21, 2006, DOF valued the 17-acre stadium site at $26.5 million, by comparing the South Bronx stadium site to land parcels in comparable Bronx neighborhoods and other comparably low-value areas in Staten Island and Brooklyn.

That valuation, about $32/sf, was “roughly in accord” with two other City-commissioned appraisals of substantial portions of the stadium site: a $21 million ($45/sf) appraisal in May 2006 of 11 acres commissioned by the New York State Office of Parks and submitted to the National Park Service; and a $40 million lease appraisal ($63/sf) in July 2006, of 14.5 acres, commissioned in conjunction with state-law requirements to proceed with the stadium project.

A day later, DOF revised its valuation of the stadium site some 600%, to $204 million, or $275 per square foot. Kucinich scoffed at written testimony already submitted by Stark, noting that DOF abandoned nearby comparables and chose “comparatively high-value neighborhoods in Manhattan."

“Why did this happen?” he asked rhetorically. “The Yankees were happy to pay more PILOTs to finance the construction bonds as long as the federal government and federal taxpayers would provide them with cheap tax-exempt bonds.” Typically, he noted, cities would raise taxes to pay debt service on bonds, therefore burdening their taxpayers with a more grandiose stadium.

“With PILOTs, the City reaps the benefits of the tax-exemption while shouldering none of the burden," he said. “Artificially inflating the stadium assessment would be the next step—albeit a graver step and an illegal step—down this path. “

A Republican is a “homer”

Rep. Christopher Cannon (R-UT), the ranking minority member, offered the city and team an olive branch. “If we have another baseball hearing,” he said affably, “I think American people are going to start worrying about whether Congress hates America’s favorite pastime.”

He said that, when the negotiations were done, the tax law was clear, though that’s not quite so: the city and state got a private letter ruling (PLR) to endorse the stadium, and the IRS then moved to close the “loophole.”

But he did provide a justification for grandfathering in the AY arena and further bonds for the stadiums, saying, “If we change the law in the middle of the deal, it would be unfair to those who put the deal together. It’s ludicrous that we are targeting New York City for entering into a legal deal.”

He criticized Kucinich for “demonizing the city” for “deciding to spur economic development in one of the poorest Congressional districts in the country.”

Moreover, he seemed to draw from testimony by Levine in stating, “This project has gone through more vetting than any other project in recent memory.”

A Kucinich ally

Rep. Elijah Cummings (D-MD) said that, despite Cannon’s disbelief at the charges, many people had heard statements regarding the “worldwide financial fiasco” that they previously would not have believed.

“What we are seeing in New York is a situation where I believe the federal government was simply taken to the bank,” he declared.

The Yankees’ take

Levine testified that, without PILOTs, a new stadium would not have been built and the Yankees would’ve been forced to leave the Bronx--a threat that, at least according to evidence presented at a hearing held by Brodsky, is certainly debatable.

He said that Brodsky voted twice for the project project and never raised any objections, that Brodsky, who says he’s against subsidies for sports facilities, “voted for a cash bailout of over $100 million to the New York Racing Association, and, “in a moment worthy of the grandstanding hall of fame,” released his report the day before the final game at “the historic Yankee Stadium.”

Sounding a bit reminiscent of former Atlantic Yards point man Jim Stuckey in both tone (earthy New York accent) and tactics, Levine cited the “tremendous transparency” (a direct Stuckey quote) for the project, invoking at least 16 public hearings and meetings and approval by the state Legislature and City Council. (AY has never been approved by the City Council.) “It is clear that the Yankee Stadium project was thoroughly vetted by New York’s elected officials,” he said.

Jabbing back

Levine pointed to the role tax-exempt financing has had in reviving cities, choosing Cleveland, the first major city to default on its bonds, while “you were mayor,” he said. (Kucinich, noted the New York Times, did not make eye contact.) Levine described Cleveland as “where my owner comes from,” a somewhat awkward reference to Yankees owner George Steinbrenner.

“Subsequent actions and policies helped Cleveland recover and prosper,” Levine said, citing the building of Jacobs Field for the Cleveland Indians.

Then he departed from his prepared testimony: “Congressman Cummings, I think we’d all agree, the building of Camden Yards [home of the baseball Orioles] in Baltimore, which was done with public subsidies, transformed that city.”

While no one rebutted that statement, it’s hardly clear. While Camden Yards and the nearby Inner Harbor clearly transformed sections of the city, Baltimore has been mired in economic difficulty, hence the grim HBO drama The Wire.

Levine went on to cite the various benefits to state, city, and borough-based firms in the project.. He said construction of the stadium “employed 6000 people;” no one pressed him on the fact that, in construction industry parlance, jobs are job-years, so the statement most likely involved 6000 job-years rather than 6000 people.

He also cited the Yankee Stadium Community Benefits Agreement (CBA), which others have criticized severely. In contrast to testimony from Brodsky, Levine said 1000 new jobs will be created and that, only because of this stadium, a long-sought new Metro-North train station would be built.

Again jabbing back at Brodsky’s reports on significant price increases in the stadium overall, Levine said that about 35% of the seats will cost $25 or less, and about 25,000 seats will have no price increase, including 5000 bleacher seats at $12.

He returned to the justification for the financing deal. “We don’t pay taxes in the present Yankee Stadium, [which is owned by the city],” he said. “If this agreement wasn’t put in place, there would be no new taxes. As a result, the PILOT services the debt. There is no money coming from New York City or New York.” He added that, while the city paid for maintenance of the old stadium, now the Yankees will pay, a $40 million savings to the city.

He concluded by responding to Kucinich: “I don’t recall ever declining an invitation on all the previous scheduled matters.” Indeed, it was the city, not the Yankees, who balked.

Pinsky: city proud of deal

IDA head Pinsky presented the city as proud of the deal. He noted, “One of Mayor Bloomberg's first acts upon taking office was to terminate previously-negotiated deals between the City and the Yankees -- deals that would have provided for a new stadium funded almost entirely out of City capital funds.” The PILOTs financing deal emerged after “nearly four years of difficult, sometimes contentious.”

He said the structure “is consistent with nearly 100 years of federal tax policy,” and cited other tax-exempt bond deals used to build sports facilities

Then, in a sly jab, he continued, “In fairness to the opponents of this project, though, there is one difference between all of these projects and the Yankee Stadium project. Namely, unlike in the cases cited above, the Yankee Stadium project succeeded in deploying this federally-created tool to encourage economic development in what the 2000 census determined to be the single, poorest Congressional district in the United States.”

He also cited the validation of the project in one of the most thorough and transparent approval processes in the history of New York City, New York State, and likely the nation.”

He described the methodology behind the tax assessment as both standard and appropriate, suggesting that a earlier appraisals were “for totally different purposes and based appropriate on entirely different sets of assumptions,” such as diffferent permitted uses and different levels of investments.”

“Claiming that a marked disparity between these valuations is a sign of malfeasance is no more logical than drawing the same conclusion from the assertion that the canvas on which a work of art is painted by a great master would be worth less if it instead contained a work by an artist with far lesser talent,” he asserted, in an intriguing comparison that was never addressed in the hearing.

“The bottom line is that the new Yankee Stadium represents a $1 billion plus investment in the South Bronx, backed entirely by payments from a private organization,” he said. "Projects like this are the reason that this type of financing exists. Absent the use of this tool, this project would have either created substantially fewer public benefits, not have happened in the South Bronx, or simply not have happened at all.”

Stark: the DOF defense

DOF commissioner Martha Stark first expressed her sense of honor at being able to testify. She noted, with a dig at Brodsky’s home district, that New York City, unlike most jurisdictions and parts of Westchester County in New York, assesses each of its properties every year.

The city uses three universally accepted methods of valuation, she said. Small homes typically are valued on the “sales approach,” based on comparables. Office buildings and residential apartment buildings that generate income are valued on the “income approach.”

However, DOF values new construction for specialty properties such as stadia, utility property, museums, court houses, and churches are based on the “cost approach,” the spending on construction.

The cost approach required DOF to estimate the cost of construction as well as the value of the land. DOF validated the costs by comparing the submitted costs to industry-published cost guidelines and to other stadia, then adjusted the costs by two factors: when the stadium was completed (time) plus the add-on cost of construction in New York City (location).

“Our estimated value for the new stadium was $1.025 billion if the stadium were completed in January 2006,” she said. Initially assessors valued the land as a vacant parcel, she said, not explaining why they made such an error. However, she said, DOF values a developed property by taking a percent--typically 15%-25%--of the overall property value. “As a result, the Finance team realized that they had not done the value correction.”

Her explanation: “they used vacant land rather than land that had benefited from government infrastructure improvements and investments.” What exactly are comparable infrastructure improvements and investments remained an issue of debate.

(Neil DeMause writes: I don't have any appraisers on speed-dial, but I did just call Independent Budget Office economist George Sweeting to get his response to all this. His reply: The city keeps two "baskets" of value for determining property taxes - land value and improvements value. "Thinking about it logically, the economic value of the land should show up in the land value," he says, while any value of stuff that's dropped on top should show up in the "improvements" line. The land under the original Yankee Stadium, Sweeting notes, is valued by the city at a mere $7 million - despite having a baseball stadium on top of it, not a housing complex.

The DOF correction

“The assessors identified 11 lots that were more appropriate comparables because they reflected land in similar neighborhoods, including Harlem, which are less than a half a mile away and where the land value had been enhanced because of significant government investment, like the investment that would be made here,” she said.

Using the median sales figure of $275 per square foot and multiplied by the 17-acre size lot that was under consideration at the time, the land value became $204 million. Adding the building and land values, DOF estimated market value for the new Yankee Stadium at $1.229 billion, later reducing the lot size and lowering the market value for the land to $175 million.

“It’s an absolute honor to be here,” said Stark, closing her testimony with a personal note. “I can only say I wish my parents were alive to see the day, their daughter from the housing projects testifying here before you.”

“We did it with the utmost sense that it was the right thing to do,” she said.

Brodsky fights back

As if coming from an alternate universe, Brodsky then got his licks in. First, he noted that “the Yankees, after initially agreeing to provide information, have flatly refused to do so,” pledging additional inquires before his Assembly committee issues a Final Report.

He said the committee stands by conclusions: “that there was no measurable economic benefit to the region or the community resulting from massive public subsidies... that the public, not the Yankees, were paying for the new Stadium, that the actions of the New York City IDA were at variance with the requirements and purposes of State law, that the binding promises made to the IRS as a condition of receiving the tax exemption were broken, that the assessments of the land and Stadium were knowingly inflated, that the public interest in affordable ticket prices had been ignored, that fundamental decisions about these subsidies were made in secret and without effective participation by elected officials, that the securitization of PILOTs was a dangerous practice which was part of an explosion of public debt....”

“The Interim Report set forth at length the unusual, inappropriate, and indefensible practices of the Department of Finance,” he said. “These included the use of comparable’ parcels in Manhattan, the failure to make required adjustments, unusual and unexamined categories of value, and the use of uncertified representations of value by an investment banker.”

“We can now add to that list the use of valuation methodologies that artificially inflated the value of the new Stadium itself,” he said, citing the issue of “Reproduction” cost (rebuilding exactly) vs. “Replacement” cost (rebuilding functionality) for determining the value of the Stadium over time--an issue that did not get much traction during the hearing..

He said that DOF requested that replacement cost be used, but agreed under stress to reproduction cost.

Did DOF lie?

While DOF claimed it was unaware of the City’s representation to the IRS, Brodsky said that was not true: “DOF was aware of this unfair and special treatment given the Yankees, at first protested that decision, and then agreed to it:

He said: “NYC DOF Assistant Commissioner Dara Ottley-Brown wrote in an e-mail to Peter White of Nixon Peabody, the lawyer for the City, that DOF ‘would like to substitute reproduction with replacement cost everywhere reproduction cost is mentioned.’ Mr. White responded asking “would it be okay to proceed without changing the language?” to which Ms. Ottley-Brown responded ‘As long as we are not held to a strict interpretation of reproduction cost new.’”

He scoffed at the DOF’s description of land valuation. If the value of Yankee Stadium were to increase the underlying value of land at the site, he said, it should increase the value in the surrounding neighborhood. But Yankee Stadium land is valued at $275/sf, while land at the nearby Bronx Terminal Market is $9/sf. He suggested that the use of land in Manhattan as a comparable to land in the Bronx “is unheard of”--which isn’t clear. “While I appreciate the reference to Harlem, they chose parcels on the Lower East Side.”

He noted that DOF cited adjustments for time and other elements, which were appropriate. However, he charged, DOF didn’t make such adjustments for the size of the parcel or the location of the parcel. “I know that, because I met with the people who did the appraisal. In the end the evidence that the assessment of Yankee Stadium was cooked was overwhelming.”

“I want to acknowledge the personal comments made by Mr. Levine about me,” he said in conclusion. “The bullying and blustering tactics of the Yankees and Mr. Levine are well known, and it will be irrelevant to the work we do, but I have never found it useful to allow personal attacks to go unanswered.”

Inappropriate action?

After about an hour, Kucinich finally got to question the panel. He repeatedly questioned Stark about possible improprieties and undue pressure from the IDA and the Yankees, but could not get her to admit to it.

He cited an email a DOF deputy commissioner reporting that a city lawyer had noted that an attorney for the Yankees wanted to know how DOF was planning to assess the stadium site. Later, the city lawyer requesting a meeting with DOF and Yankees, noting that the Yankees had “an interest in seeing the assessed valuation will be high enough to generate as much PILOTs as is lawful and appropriate.” The lawyer also wrote that the deal was “on the fast track.”

Kucinich asked Stark if it was appropriate for DOF to factor in that “interest” expressed by the Yankees, and whether it was a typical consideration.

Stark remained cool. “As I said in my testimony, and even the email you quoted, we were asked to do what is lawful and appropriate,” she said.

“Is it typical for the city attorneys to convey to DOF officials that a property owner has an interest in a certain DOF assessment?” he asked.

“I wouldn’t say it was coming from City Hall at all,” Stark responded, arguably evasive in content if not tone. “What was going is, because I believe city was preparing an application, they needed to understand how we’d value the stadium if it was completed.”

She said it was “not atypical for people to ask us how will we value property when it’s completed and when it’s done. There was no pressure on us.” She cited the DOF’s recovery, under the Bloomberg administration, from a tarnished reputation, including tax assessors who took bribes.

“A lot of times we are contacted to let us know if there is something going on,” she said.

Kucinich asked for examples.

Stark cited the former Board of Education building in Brooklyn, now the development known as 110 Livingston Street. “We were contacted because the building was hopefully going to be redeveloped, and we were asked what will be the value of that building if it were redeveloped.”

[Neil DeMause notes that it was a publicly owned building.]

Kucinich asked her to prepare a list of other examples.

“Did it seem strange to you that a higher assessment was being sought, rather than a lower one?” he asked.

“It seemed to me an appropriate assessment was being requested and that’s what we provided,” Stark responded unflappably. “We came up with a value that we believe was lawful and appropriate consistent with widely acceptable appraisal methodology.”

Did DOF know

“Were you aware that the reason Yankees had an interest in a higher assessment was to support a higher amount of PILOT-based bonds?” Kucinich asked.

“No, sir, I was not,” Stark replied. “People on the finance team do not at all get involved in how PILOT is calculated. We leave that to EDC people.”

Cannon vs. Brodsky

Cannon challenged Brodsky, asking, “Isn’t it largely up to the states to how they use those bonds?”

“My plea is that you put some common sense restrictions on that,” Brodsky said. “There’s no value to the economy of the United States when the state of New York buys off a corporation to move from Pennsylvania.”

(Indeed, a city main justification for the Nets arena is that it would capture tax revenues that currently go to New Jersey, though that’s hardly an argument for a federal subsidy.)

Why should the federal government limit what states want to do, Cannon asked.

Brodsky, who usually has the opportunity to occupy the seat of the questioner, considered his language. “Well,” he said, “because once in a while states would choose to do things that are not a good use of national resources.”

“Good use implies somebody is much wiser than someone else,” suggested the conservative Congressman.

“That happens all the time, Congressman,” Brodsky responded tartly. “That’s your job. That’s my job.”

Cannon suggested it was a clash of philosophies. He said choices should be made at the lowest levels of government rather than imposed from above.

“Respectfully,” Brodsky riposted, “Congress sets standards for the expenditure of federal dollars all the time.”

Stark’s defense

Cannon asked Stark about reproduction vs. replacement costs.

“The difference in what Mr. Brodsky suggested is pretty odd to me,” Stark said. “We use replacement cost 10 to 15 years down the road if we have to value the stadium as it is. When you use reproduction costs, you have to take a calculation off for depreciation... The distinction is irrelevant for this stadium, and the reason is, we had actual cost numbers to estimate the value.”

Cannon asked about the email statement regarding not being held to “a strict interpretation.”

The latter, she said, would require calculation of depreciation. “My understanding is that reproduction and replacement costs are interchangeable in IRS regulations,” she said.

Cannon asked if there was anything inappropriate in the email.

“Absolutely not,” Stark responded.

What about the distinction between the $275/sf and $9/sf valuations, he asked.

Bronx Terminal Market, she said, is valued not by the cost approach, but by the income and sales approach.

Pinsky’s defense

Cannon then used his allotted time to let the other panelists respond.

Pinksy wanted to provide some context to an email Kucinich cited, in which the IDA head was seeking the projected assessment for the stadium.

“Are you saying you needed ‘a number’ or 'the number,’” Kucinich asked.

“We needed a number,” Pinsky responded.

Diplomatically, Pinsky said he wanted to “point out an error,” which, arguably, was a skewing. He noted that Kucinich quoted his email, which said “I’d like to understand what DOF’s projected assessment is before it is released publicly to make sure it conforms to our assumption.”

While that sounds suspicious to some, Pinsky allowed, he said it continued with these words: “and if it doesn’t, to understand what the implications are.”

Kucinich presses on

“What would the implications be?” Kucinich asked, unapologetically.

“That the PILOT may have been lower than what we were projecting,” Pinsky said, “and that could’ve created an issue with the underwriting.”

“Fortunately, the number that came out of DOF, through no pressure on our part,” he said, “was not that far off from what we projected.”

Kucinich pressed on: “Did you or anyone working with you or at your behest have any contact with anyone who was instructed to contact DOF relative to the number that was needed to correspond to the specific PILOT?”

“I am not aware of that, no,” Pinsky said. “Let me be clear. There was contact with DOF,” he said, but it was not pressure.

Kucinich offered, a bit sarcastically, “I would just say, before we move on, luckily, everything worked out, it’s really quite amazing.”

“No I wouldn’t call it--” Pinsky started to respond.

Kucinich cut him off and turned to Cummings.

Cannon, Kucinich’s ideological opponent, interjected jocularly, “I’m thrilled you have so many tickets at 25 bucks.”

Kucinich responded sharply, “If I may say this to my colleague, this isn’t about baseball.”

Brodsky: “smoking gun”

Cummings asked Brodsky what concerns him the most.

“The documents the Chairman read into the record are a smoking gun,” Brodsky asserted. "Using the normal methods of assessment, the department came up with value of the land under the stadium of about $26 million. That got reversed by the use of extraordinary and I believe illegal methodologies, which include use of land on the Lower East Side to measure the value of land in the South Bronx."

“They could not generate enough money to pay the PILOTs with the assessment that was coming, so they changed it,” he said. “That is a violation of sworn promises to IRS by the IDA. If you’d like, sir, I’ll prepare a brief.”

“You’ve basically said somebody did something that was illegal,” Cummings continued. “Did I hear you wrong?

“I said precisely, Congressman, what I said,” Brodsky responded. “My committee is not charged with making determinations of legality... But what we saw and the inquiry showed and what the sworn documents show, is that the promise to use the same processes to assess the Yankee Stadium project that were used for other properties in the same class were not used. Those facts I am absolutely certain of.”

Stark responds

Cummings turned to Stark: “You heard what he said, didn’t you?”

“I did,” she said, with an edge in her voice.

She offered a defense of the DOF’s choice of the Lower East Side, one that I think was questionable and certainly would get more scrutiny at a hearing held in New York City.

“The Lower East Side is not a very wealthy part of the city,” she said, noting that “only two of the sales came from there. “The majority came half a mile away, from Harlem.”

When looking for comparables, she said, “you look first and foremost” in proximity to the site of the property.

That answer did not explain fully why the Lower East Side was chosen at all.

Stark suggested that Brodsky meant that most people think of Manhattan as having high-value real estate in Midtown. “The Lower East Side in this regard is much more analogous to Harlem and the South Bronx, the reason being, in order to generate any kind of investment in those communities, the city had to step in and do infrastructure improvements, whether by investing in housing, taking over abandoned buildings and the like. The Lower East Side is not one of the better neighborhoods in New York City--that is the point I was making. It is more analogous to Harlem, more analogous to the South Bronx.”

Well, the Lower East Side is certainly more analogous than midtown, but it has gentrified much more considerably than the South Bronx. (In fact, when she cited Alphabet City, the location is not the Lower East Side but the likely more valuable East Village.)

While Stark said the “significant government improvement and enhancement” in the areas chosen for comparables constituted investment in housing, for the Yankee Stadium plot, the investment was the new MetroNorth station.

While her statement may have sounded plausible, panelists could have pointed out that the city already had made significant housing investments (and one of the poster children for prudent use of eminent domain) in Melrose Commons, just a 20-minute walk east of Yankee Stadium.

Stark insisted that there was nothing inappropriate and nothing illegal. “Again, [Brodsky’s] own district doesn’t revalue property on a regular basis, and we do.”

Kucinich presses on


Kucinich tried multiple times, to get Stark to acknowledge that DOF acted in recognition of the PILOT issue, and she kept saying no.

“Did anyone have any communication with you, either Mr. Pinsky or [city official] Mr. [Joshua] Sirefman, relevant to the financing structures that rely on the PILOTs?” he asked.

“No sir,” she said.

Then he played prosecutor. “I’d like to give you a chance to reconsider your answer, in light of an email--”

Pinsky had turned to Stark, and Kucinich interrupted, with an edge in his voice: “Excuse me, Ms. Stark--”

“Sorry, sir,” she responded.

“What did Mr. Pinsky just say to you?” he asked, then addressed Pinsky: “Are you her counsel?”

“No, I’m her colleague,” he responded a bit abashedly.

“What did Mr. Pinsky just say to you?” he continued tensely.

“He said he through there might have been an email where they said they thought the PILOT was going to be calculated,” Stark said. “I’m assuming you’re going to read me a relevant portion and I’ll look through my files.”

Kucinich pointed to a March 20, 2006 email from Sirefman to Stark, under the subject line “Quick stadium question,” asking whom Pinsky should speak to about the issue. Another email, from Pinsky to Sirefman, stated, that he wanted to understand the assessment “before it is released publicly to make sure that it conforms to assumptions, and if it doesn’t, what the implications are,” then asking for a contact person at DOF.

“Now that you’re aware of this exchange,” Kucinich asked Stark, is there anything she wanted to add, and were there any other contacts?

Stark remained calm. “You read the full text of the email,” she said. “Nothing in there tells us other than it relies on PILOTs, which are limited to what the real estate taxes would be... This doesn’t change anything I said.”

Kucinich pressed on: “There was a communication where you learned that something was at stake with the assessment.”

“Sir, I don’t agree with you,” Stark responded, not implausibly. “It seemed to me what was at stake is they needed to now how we’d value the property, when we’d finish valuing the property. That was all that was at stake.”

Going to the overheads

DOF, however, had provided the subcommittee with five versions of a document titled “estimated market value for proposed Yankee Stadium,” prepared in just one month, between March 10 and April 10 of 2006. Kucinich had the documents projected on a screen.

The March 21 document, which valued the site at $26.8 million, used land sales in the Bronx, Staten Island, and Brooklyn, at $24-$52/sf, with the DOF choosing $33.50.

The March 22 document used $275/sf, with comparables solely from Manhattan.

“Ms. Stark, can you tell the subcommittee what accounts for sudden and dramatic difference in the site assessments?” he said, pointing to a “flurry of email traffic.”

Stark responded, “Typically, there are two ways in which you verify the accuracy of land value over the building value... One way is you look at overall value and take a percent to arrive at land.... Once it’s constructed, the value of the stadium actually enhances the value of the land... We wanted to look at properties that were enhanced by government investment and improvement. Washington Heights, Harlem, Manhattan Valley, these sales prices were more consistent with what we were asked to value.”

A balm for the defense

Cannon then got a chance to lob some softballs at the panel. He asked Pinsky about the many different bodies of government that approved the contract, the number of jobs, and the IRS private letter ruling that enabled financing.

Questioning Brodsky

Then he turned to Brodsky, asking if he’d voted in favor of the project.

Brodsky said state law required a vote on alienation of park land, not a vote on the merits of project. “I’d still vote yes,” he said, saying it wasn’t the legislature’s job to substitute its judgment for local government as long as the parkland was restored.

Not transparent?

“Why you think this was not a transparent process?” Cannon asked.

“It’s a fair question,” Brodsky responded. “It was a busy process.” The meetings cited “did occur. They were framed by public announcements that were not true. The vigilance that the community would normally have applied because they accepted some of these at the beginning was not what it should’ve been.... The bottom line was that the processes were formal and in many cases manipulated.”

Cannon asked if the Bronx was better off without the stadium.

Brodsky said no.

Was it a net benefit to the area?

Yes, acknowledged Brodsky. “It is not, however, a requirement to pour probably close to $2 billion of public money into that to rebuild it when the primary issue was: could the Yankees have afforded to do this without taxpayer money?”

What’s socialism?

“This is socialism, Congressman, of a kind which, as you described your district, that they would not easily take to," Brodsky continued. "There’s got to be a public return. There’s no public return.”

Cannon tried to debate Brodsky: “That’s when when an individual substitutes his judgment for what people want.”

“No, socialism is when community pays for private enterprises,” Brodsky said.

“No it is not,” Cannon responded. “Socialism is actually a well-defined concept that starts with the public contract...” He lost his train of thought before recovering by changing the subject: “The short of it--the issue here is tax policy.”

He asked if Brodsky had ever been opposed to public assistance to sports activities.

“Yup,” Brodsky said, citing legislation 15 years ago to restrict drunkenness at Yankee Stadium. He also said he questioned subsidies regarding electricity for Madison Square Garden. But he didn’t say anything about the larger issue of tax-exempt bonds for sports facilities.

Losing track?

Cannon gave Levine a chance to respond. The Yankees official noted that Rep. Jose Serrano, whose district includes the stadium, is “a very strong supporter, as are all of Mr. Brodsky’s colleagues from the Bronx.”

Cummings tried to refocus the panel: “There’s been a lot of discussion about all the wonderful things that the stadium is doing. That’s nice, but that ain’t the issue. Not for me, anyway. What I want to make sure is that there’s been integrity in the process.”

Kucinich presses on

Kucinich continued to analyze email communications among city and IDA officials regarding the DOF assessment.

Pinsky told a staffer he believed “it would be helpful to have directive from the top that we should be cooperated with.”

“It appears Mr. Pinsky called [the DOF’s] Ms. Ottley Brown at least once, the afternoon of March 22,” Kucinich said, noting that, during the same same afternoon, a DOF assessor forwarded Ms. Ottley-Brown a new list of land sales to be used as comparables. That evening, the assessment leaped.

He asked Pinsky if he remembered the phone call.

Pinsky said he had “a recollection of the phone call,” noting that he discussed “the need for us to receive this number because it was a part of the Yankee Stadium transaction,” the timing, and to make sure “we were coordinated on the announcement of the figure that was provided by DOF. In the event it was a number that was different from what we expected that we could react accordingly.:

“Do you have any explanation for the fact that the estimate went up so substantially?” Kucinich asked.

“I think we heard an explanation from Commissioner Stark, namely that the DOF looked independently at the numbers... and realized they didn’t make sense,” Pinsky said. “I can also say that the change had nothing to do with the conversation we had.”

“Did you explain to Ms. Ottley-Brown that, to support the planned PILOT paid by the Yankees, and the planned bond issuance, that the assessment had to be revised upwards?” Kucinich asked.

“I have no recollection of the specifics, but I can tell you for certain in no event I would’ve told her or anyone else from the DOF--” Pinsky said

Kucinich continued contentiously: “On the one hand, you said you had no recollection.”

“You asked a specific question,” Pinsky responded calmly. “I don’t recall how I phrased it. But--”

Kucinich, cutting him off, turned to Stark: “Do you have any knowledge of the phone conversation between Mr. Pinsky and Ms. Ottley-Brown?”

“I don’t have specific knowledge,” Stark said.

Other than the communication in which DOF was asked to coordinate on the announcement of the number, because of an upcoming City Council hearing, “I know of no other conversation between my staff and Mr. Pinsky’s staff,” she said.

She also noted that DOF “never released the number you cite, the $26.8 million... It was being reviewed internally... and that has been provided to this committee based on your request."

Cummings, in the tone of a country lawyer, interjected: “I’m just listening to all this. You had a figure in mind, didn’t you?”

“To be honest, I was not really working on the financing side,” Pinsky responded. “I knew there was a figure we had projected would be the figure.”

“That’s the figure I was talking about, the one you projected,” Cummings said.

“We absolutely had a figure,” Pinsky replied.

“How’d you come up with that figure?” Cummings asked.

“I believe that it was projected by the underwriters for the bonds,” Pinsky acknowledged.

“Was that figure communicated to anybody in Ms. Stark’s office?” Cummings asked.

“I don’t remember having communicated it,” Pinsky said, avoiding a flat denial.

It shouldn’t be strange, he said, that the numbers were similar, “if our underwriters were applying DOF’s standard methodology and DOF went and... came up a similar number.”

(That begs the question: how exactly did the underwriters apply DOF methodology? Isn’t it more likely they figured the assessment needed to match the PILOTs?)

“Ms. Stark," Cummings continued. "I want to make sure there’s nothing where somebody says, ‘Y’know, we’re going to come up with a 26.8 [million-dollar] figure and then somebody from your shop says ‘Wait a minute, that’s not going to work, it should be ten times that.’ That goes against the integrity piece... nothing like that happened?”

“That’s correct, sir,” Stark responded.

What about the L.E.S.?

Cummings asked Stark to describe the Lower East Side.

“It’s a neighborhood in Manhattan outside the Central Business District,” Stark responded. “It’s a part of town that has not done as well as Central Manhattan, more analogous to Harlem and the South. Bronx... it’s called Alphabet City, it’s kind of more of our bohemian sort of neighborhood.... It’s come back, in large part, because of the city’s investment in making sure all of the abandoned housing has been much improved.”

“For the record, we absolutely were not told what was the number or any number,” she insisted.

Cummings asked what specific part of the Lower East Side was involved.

“Down in the Sixth Street area, and over east,” Stark responded.

“Assemblyman Brodsky, you look you’re going to fall over in your chair,” Cummings observed.

“I want to explain once for the record what we found, why the practices were inconsistent with promises made and standard practices,” Brodsky responded. “First, the location of the comparables... The notion that the Lower East Side and Manhattan Valley is comparable to the area around the stadium, which you just referred to as the poorest community in New York, is laughable. It was chosen for a reason--the values are higher, much higher.”

Strategic adjustments for value

Then he pointed to the sizes of the lots chosen for comparables, including 4000 sf and 8000 sf. Yankee Stadium is 742,000 sf. “It is customary practice to adjust for parcel size when doing this kind of assessment,” Brodsky said, in high dudgeon. “They did not do that. It is also customary and required that they adjust for location... No, they did not.”

It is also customary to adjust for time, given that values go up. In this case, they did.

“Where an adjustment required by standard practice raised the assessment, they did it," Brodsky concluded. "Where an adjustment required by standard practice would've lowered the value, they did not do it."

As the hearing continued, there was no rebuttal.

Kucinich observed that the documents withheld are in the categories "that most likely will reveal if any improper inflation occurred and who directly pushed for the inflation."

Honing in

In the last round of questions, Kucinich pressed Stark about the “seemingly mutually contradictory explanations” about the increase in land value.

He noted that she contended the earlier $26.8 million assessment was incorrect, because it was based on value of a vacant parcel, and that DOF values developed property at typically 15% to 25% of overall value. “DOF indicated to IRS and bondholders that it is following the cost approach,” he noted. Thus, is it appropriate to value at a percentage of land value, or should it derive from comparable sales?

Stark clarified that DOF did not certify anything to IRS or bondholders: “The IRS ruling letter was made and requested by IDA and EDC.”

“Didn’t you make it to IDA and they accepted it” asked Kucinich.

“We let IDA know what we estimated,” she said.

“I was asked, how do we validate that number: we wanted to make sure we had checks and balances to make sure the land value as a percent of overall value made sense,” she said. “We looked at sales of land that were enhanced or improved by government investment.”

“I’d also beg to differ with Mr. Brodsky,” she said, noting that sales figures from the Lower East Side, $383/sf, were adjusted, given that DOF used $275/sf.

“How does this percentage method, even if it’s allowable under the cost approach and feasible, without knowing total value,” asked Kucinich, “square with the fact that, for both initial and final assessment, DOF valued land using comparable sales and not a percentage method. And, in fact, there’s absolutely no indication, from the documents produced, that a percentage method was the appropriate methodology, until we received your testimony yesterday."

“I wish the property tax were not as complicated as it is,” Stark responded. “I’ve spent an entire lifetime--”

Kucinich, cutting her off, asked for a direct answer.

“We arrived at overall land value using a comparable sale approach, then as a test,” Stark said, “What you do is check it as a percent of overall building value and the overall total value. We did not use that approach to value the property, we used it to validate the resulting land value that we got from using comparables.”

What improvements?

Kucinich asked Stark about the infrastructure improvements she had referred to, asking for another example where DOF increased a valuation sixfold. He also asked why commercial property nearby is assessed at such a lower rate.

Stark again pointed to the difference between the cost approach, used for stadiums, and the income approach used for other nearby properties.

While the $26.8 million value used sales from every single other borough, she said, it “was not specific to vacant land sales that had been enhanced by government improvements and investments.” In Harlem, she cited a new supermarket and the rehabilitation of abandoned housing.

Kucinich asked why distance has anything to do with the appropriateness of comparables, noting that East Harlem abuts the Upper East Side. He noted that the “site of the Columbia University expansion and trendy Alphabet City” weren’t comparable.

“Do you expect me or this subcommittee to believe that this... was anything other than cherry picking?” he asked.

“Everything in real estate is location, location, location,” Stark said, adding that, in “Harlem, yes, absolutely, there has been a boom.... sales less than half a mile away are absolutely appropriate to use.” (She didn’t defend the Lower East Side properties in the same way.)

She said she knew nothing of the May 2006 parks appraisal until Brodsky released his report. Other appraisals, she said, “were irrelevant to us.”

No negotiation

Cannon gave Pinsky a chance to flesh out the remarks he was about to make before he was cut off.

“The question was: was there any sort of negotiation between EDC/IDA and the DOF? I wanted to say, categorically, there absolutely was not. We were not aware of the 26.8 number or any other number until the numbers were presented to us as final.”

He added that the figure sent to the IRS for the assessment of the property, $204 million, was later cut to $175 million when DOF realized that a portion of the lot used for a garage should be excised.

“I think you all have responded to complicated questions,” Cannon said approvingly. “You’ve been very consistent... If the hearing is about whether is there is perfidy, I think the laundry has been aired entirely.”

Who pays for the stadium?

As the hearing wound down, the panel got to the question of whether PILOTs represent a total public subsidy or not--an issue of debate regarding the AY arena, as well.

“Congressman, the private payments are the taxes they owe,” Brodsky said. “It’s as though you built an extension on the house and you said to the taxing authority: send my payments to the bank to pay off the mortgage. The notion that this is being paid for by the Yankees is delusional.”

Levine responded, “Mr. Brodsky, he really knows better. We don’t pay taxes now. We’re a tenant. We don’t pay taxes at the old Yankee Stadium. As I said before, there would not have been a new stadium, unless this mechanism was put into place.”

The new facility will be owned by a city entity, and “the money we will pay this entity will go to service the bonds.” There’s no money coming out of the city treasury that could go to schools or hospitals, he said, leaving out the various infrastructure improvements and other costs.

Cannon seemed pleased. “Fundamentally, I don’t think taxes are owed,” he said, adding, “I’m anxious to get it done and get up there and watch a game.”

Would they leave?

Cummings focused on the threat by the Yankees. “Where were you all going to go, Mr. Levine, Baltimore?”

“We’d love to have you in Salt Lake City,” offered Cannon.

“It’s been no secret, for many years,” Levine said, “the New York Yankees said, if they didn’t have a new stadium, they’d have to move elsewhere. There were no shortage of suitors... We wanted to go the extra mile to stay in the Bronx.”

The Times reported today that Levine after the hearing refused to be specific but said New Jersey has wooed the Yankees. A representative of the New Jersey Sports and Exposition Authority, however, said no such conversations had occurred. (Brodsky's report, issued in September, indicated that no evidence has been offered.)

Having it both ways?

Cummings pointed to an analysis, made in the past by Neil DeMause of Field of Schemes, that “Mayor Bloomberg and you seem to want it both ways. You tell city and state audiences that the stadium PILOTs are not in fact foregone tax revenues, but are instead private payments...Then you turn around and tell the federal government that PILOTs are tax revenues, and thus public money.”

He pointed to a quote from Bloomberg: “Others use public money; we build these stadiums with private money and the state and city put in a relatively small amount for infrastructure.” At Brodsky’s hearing in July, Cummings pointed out, Pinsky testified that “the entirety of each stadium is being financed entirely by payments from the teams themselves.”

Pinsky, he noted, had testified that, because the stadium had always existed on city owned land, it never had been subject to real estate taxes and the structure represented no net loss of expected revenue.

“I have to commend you, your elegant argument is precisely the one that we’ve been trying in vain to get the Treasury Department to accept,” Cummings said. “PILOTs in this context aren’t taxes, they don’t replace taxes. Economically they function as private payments. The IDA didn’t display such common sense when it requested a tax exemption from the IRS. You said “the city has determined to use its property taxes, in this case PILOTs, to finance the construction and operation of the stadium.”

“Mr. Pinsky, which is it: are PILOT payments private or public money? Are they a private payment and therefore not generally applicable taxes? Or are they a tax payment and therefore not the Yankees’ money, but the city’s?”

Pinsky responded calmly, “They are a payment in lieu of generally applicable taxes, which is exactly what we explained to the IRS.” He added, “What made this project particularly attractive to the city of New York was the fact is that currently we receive no real estate taxes from the Yankees... Here we were able to impose a tax on the Yankees, which is a generally applicable tax, and use that money to finance the stadium.. the net effect of that is that the City of New York ended up in same place it had been previously... but Yankees were in a materially less profitable position, in that they were paying taxes, and that those taxes or PILOTs were financing the stadium.”

No one pointed out that the “materially less profitable position” allows the Yankees to gain significant new revenues.

[Neil DeMause observes: This is a clever sleight of hand that Pinsky is attempting: The city "imposed" a tax on the Yankees, but it's not a special tax (which can't be used for tax-exempt bonds), but rather a generally applicable tax that just happened not to be applied to the Yankees before now. So it's not money the city would have gotten otherwise, but it's still public tax money for IRS purposes.]

Cummings asked if the revised regulations, as issued this week, would have affected the deal.

Pinsky said a fixed PILOT would be banned, but “it doesn’t necessarily mean the project couldn’t have happened... The important thing to note is: IRS isn’t saying you can’t use PILOTs. It’s also not saying you can’t use fixed taxes... the reason why the city and state of New York objected to the proposed regulations... in certain states, you’re actually able to fix taxes.... but we can only fix PILOT payments, that’s the only change... IRS is saying you can’t use PILOT-backed bonds.”

And what if Treasury Department had not grandfathered in the three New York projects?

“The only option for the city would’ve been to impose a floating PILOT, rather than a fixed PILOT,” said Pinsky, not explaining that it likely would’ve been much harder to sell.

Circling back to AY

“Just to clarify one thing,” Pinsky added. “The regulation that was imposed and that was issued, with all due respect to Randy [Levine], although it helps potentially the Yankees and Mets, it was most important to us was because of the impact that the new regulation would have had on the Atlantic Yards project in Brooklyn, which is a major economic development initiative of the city and the state... that has not gotten under way yet.”

Closing the hearing, Kucinich again expressed disappointment “that the city has not produced 70%” of the documents requested. “This subcommittee is not in the business of ‘gotcha.’ We have provided reasonable time for witnesses to be able to respond, to be able to tell their story,” he said. “But it would be helpful if the city were ready to be more helpful than it has.”

Thanking the witnesses, he concluded: “We’re going to continue our work here, make no mistake about that.”