Tuesday, April 28, 2009

Lessons from Times Square redevelopment: even after legislative approval, financial accountability is needed

(This is one in an irregular series of articles about issues that a State Senate committee might address when it holds a hearing on Atlantic Yards.)

City Hall has published a partial transcript of the April 8 Q&A with Empire State Development Corporation (ESDC) CEO Marisa Lago. I already reported Lago's acknowledgment that the project would take "decades," and her equanimity regarding an attenuated time line.

I also reported Lago's statement about the aggressive governmental commitment to the project, but the full quote is worth a look: "I think the important thing is the commitment that the government has, that the city/state government has in working with Forest City to drive the project forward."

But what does that commitment mean? Could it mean additional direct subsidies, tax breaks, or indirect subsidies? And, though no real cost-benefit analysis was conducted by the state, isn't one in order, drawing on new data?

Lessons from Times Square

I took a look at Lynne Sagalyn's 2001 epic analysis of redevelopment, Times Square Roulette, and saw both warnings and guidance.

Sagalyn writes:
The essence of public development is the open-ended nature of the commitments--financial and political--necessary to keep a project moving forward, especially once large amounts of money have been invested. Each side may have to make new commitments or follow through with existing obligations when, if operating unfettered and independently, its economic interest would be best served by not doing so....

In regard to Atlantic Yards, how open-ended is the government's stated commitment?

Fundamental asymmetry?

What happens when a project hits a rough spot? Sagalyn writes:
The fundamental asymmetry, however, is that the developer can generally leave the project and even the city while politicians cannot. When a project-threatening crisis emerges, the politics of pragmatism commands that public officials search for a solution by finding ways to recast a deal, amend a plan, or take on additional risk by investing more dollars (directly or indirectly) to salvage a project in the hopes of moving forward. As developers rather than regulators, public officials cannot afford to be passive. Waiting for a market-driven revival of private development is not a politically feasible option because neither mayor nor governor can risk the charge that he failed to act to achieve the promises of a high-priority project.

Again, she suggests that the developer has the upper hand. In the case of Atlantic Yards, I think it's more complicated. Sure, both developer and government have invested significant sums, and thus have a certain amount of professed momentum. And both the governor and mayor presumably would like to cut a ribbon opening the arena.

Then again, should Forest City Ratner leave the project, that means the basketball Nets would continue to languish at the aging Izod Center in the Meadowlands, where the profusion of unsold seats this season prompted another piece of creative marketing: "sky banners" to hang advertising in front of empty seats. And FCR needs a new arena to raise the value of the team.

Passing the "smell test"

Sagalyn continues:
The political imperative is the bottom line and forces the search for a solution. With many technical sources of camouflage, public officials generally have options for restructuring a deal. From a policy perspective, what matters is whether the solution afforded some protection for the taxpayer, or whether the gamble of political and economic resources is discoverable, and, if so, passes the "smell test" when challenged by opponents....

Well, it can't pass the "smell test" until it passes the transparency test, and we so far don't know the contours of the deal being discussed.

We don't even know the timetable or the project cost, though the ESDC says such information is coming. And we sure don't know about additional subsidies.

Closer evaluation

Sagalyn argues that, given the lengthy project buildout and economic changes--situations that have recurred in the case of AY--further analysis was warranted:
This context of review intensifies the accountability issues attached to public deal making, as does the task of coping with a changing economic context and its implications for already-cut deals. Both issues make apparent the need for financial accountability of public deal making, after initial legislative approval. By the conventional norms of public policy, this means some type of review of the public’s financial commitments, an ex-ante evaluation of a deal's costs and benefits or an ex-post audit of financial transactions or both. That the public resources in question may be in the form of off-budget foregone revenues (rent credits or tax abatements) or long-term contingent commitments (ESAC) rather than direct cash grants or loans does not change the logic. It only complicates the tasks of analysis and explanation.
(Emphasis added)

Need a cost-benefit analysis

Sagalyn suggests that the up-front process can be improved, as well:
Greater accountability can, however, be built into the current process in a number of ways. Improving the quantity and quality of information on the city’s financial commitments is key. Disclosure of the essential terms of leases, for example, offers a technical glimpse of contrasts, but this sheds little light on the underlying economic fundamentals of a complex deal and how its many parts fit together. The present process of review should be augmented with an economic evaluation of the business terms of a deal--written in clear, nontechnical terms and available to all interested groups--including an assessment of the risks faced by the city. Such an analysis should clarify the nature and extent of benefits derived by the private sector--including their timing, as well as any costs associated with the delivery of public improvements and other components of the public-benefits package. On the public side of the ledger, it should account for the full set of costs--the present value of projected tax expenditures as well as direct spending by all participating public entities--set against the present value of projected municipal revenues from the project. Even though quantifying some of the costs and benefits presents challenging analytical problems the current state of affairs leave much room for improvement.

Accountability needed

Sagalyn concludes:

If deal making is to progress as an effective and politically sustainable strategy in the took kit of development officials and city planners, the protocols for democratic accountability need to be further refined.


Perhaps that refers to legislative oversight, as well.

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