Thursday, September 10, 2009

Net gain to Ratner, loss to public: IBO says developer saves $726M on arena; city loses $40M plus another $180M in opportunity costs

In the absence of any effort to update the flawed fiscal impact reports from the city and state on Atlantic Yards, the Independent Budget Office (IBO), at the request of several elected officials, has updated its September 2005 Fiscal Brief on Atlantic Yards, with far more pessimistic results.

Unlike the previous report, which found a modest net gain for the city over 30 years, the new report, titled The Proposed Arena at Atlantic Yards: An Analysis of City Fiscal Gains and Losses, estimates that net revenues would be negative for the city and modestly positive for the state and the Metropolitan Transportation Authority (MTA)--at least until significant lost opportunity costs were added.

Moreover, the losses for the city would be far greater--another $180.5 million--were opportunity costs to be calculated. Such opportunity costs--foregone gains thanks to tax exemptions and other below-market benefits--were not fully calculated in the 2005 report.

Indeed, the combination of subsidies and tax breaks, including $194 million in federal tax breaks on tax-exempt bonds, adds up to what the IBO calculates as $726 million in savings on the arena for developer Forest City Ratner. And that's without assuming--as does Assemblyman Richard Brodsky, in the case of the new Yankee Stadium--that the use of PILOTs (payments in lieu of taxes) to pay for a sports facility constitutes a full subsidy in itself.

[Clarification 2/20/12: The $726 million is likely overstated by some $50 million, given that it's based on $678 million in tax-exempt bonds, rather than the $511 million ultimately sold. But the overall subsidies for the project, including not-yet-allotted housing bonds, surely would lift the total well over $726 million.]
Arena focus

The IBO report, which follows up testimony by IBO Deputy Director George Sweeting at the 5/28/09 state Senate oversight hearing, focuses only on the arena, not the project as a whole. The previous report, which similarly was limited to the arena, did attempt to estimate additional costs for education, sanitation, police, and fire services.

Still, the IBO backs up new concerns--in a report from the Council of Brooklyn Neighborhoods submitted to the Empire State Development Corporation--that the project benefits, promised in a decade, are unlikely in that time frame, citing "much greater uncertainty about the timetable for the rest of the project," with weakened credit markets and lower demand for office space and luxury housing.

The highlights

From the report:
• Over a 30-year period, the arena would cost the city nearly $40 million more in spending under current budget plans than it will generate in tax revenues (present value, 2009 dollars). The costs total nearly $170 million from financing city expenditures on the arena and the loss of existing tax revenues at the site.
• For the state, the arena would have a net fiscal benefit of $25 million as new tax revenues would exceed spending currently budgeted for the facility. The Metropolitan Transportation Authority would garner nearly $6 million in new tax revenues.
• The new direct and indirect economic activity generated while the arena is under construction in 2010–2011 includes an annual average of 3,282 new jobs in the city, most in the building trades. When the facility is open there will be an average of 955 new jobs, many of them part time, and mostly in performing arts and spectator sports.
• For the developer, Forest City Ratner Companies, the mix of special government benefits result in total savings of $726 million.

The project also includes tax exemptions and other provisions that reduce the level of potential additional revenues the arena might generate for the city, state, and Metropolitan Transportation Authority. These opportunity costs total $181 million for the city and $16 million for the state, plus another $22 million for the transportation authority due to its below market rate sale of land. Were governments not denied these revenues, the city would realize a substantial net fiscal gain from the arena instead of a net loss.
As-of-right benefits

Beyond the uncertainty about the timetable for the rest of the project, the IBO says that "the arena accounts for virtually all of the discretionary benefits flowing to the project" while the rest of the benefits are either as-of-right or special arrangements that would result in benefits that are consistent with those as-of-right programs.

Still, the diversion of scarce housing bonds to Atlantic Yards as opposed to other projects could be seen as a partial subsidy, if the per-unit costs for this project are considerably more.

Calculating benefits

What are the benefits? The IBO cites "direct contributions of cash, capital investment and property; access to tax-exempt financing; exemptions from property, sales, and mortgage taxes; and a below market sale of MTA property."

While the city initially gave $100 million to the project, then another $105 million, IBO says that a portion of the latter "would likely have occurred in the absence of the project," so it only counts $50 million.

Also, the tax-exempt bonds for the arena would save the developer $194 million, with nearly all the cost born by federal taxpayers. That makes the financing arrangement a tempting tactic for city and state officials, but a more questionable one from a federal perspective, especially given an underutilized arena across state lines in Newark.

Upping lost property taxes

The IBO states:
The PILOT financing structure depends on the arena tax blocks being exempt from city property tax, but granting this exemption represents an estimated $146 million (present value) opportunity cost. That amount reflects IBO’s estimate of the property tax that would have been owed over 30 years if the arena were assessed as if it were privately owned.5 Forest City Ratner’s savings are just equal to the city’s revenue loss.

This estimate of the cost to the city of the arena’s property tax exemption is considerably larger than we estimated in 2005. The MTA portion of the land is currently tax-exempt because the land is publicly owned. IBO’s latest estimates assume that if FCRC or any alternative developer operating solely with as-of-right benefits purchased the rail yard from the MTA, the exemption would expire. In our 2005 report we had assumed that the exemption would continue through a leasing arrangement—even if the arena site were transferred to another developer—because that would maximize the proceeds for the MTA. It is clear that the MTA’s ability to maximize its return from property sales has been constrained. Moreover, the latest modified project plan stipulates that FCRC must pay the equivalent of full property tax to the city for all but the arena portion of the project.


New revenues

In calculating arena revenues, IBO states:
IBO assumes half of the money spent by Nets fans, concert-goers, and other spectators at the new arena and surrounding area would amount to an infusion of new spending into the New York City economy (the other half being spending shifted within the city by residents). This estimate assumes that a portion of existing Nets fans would travel to Brooklyn for games, and that a team in Brooklyn would be able to attract fans from Long Island as well as from the city. Most of the new spending occurring in the city, however, is spending that would otherwise have taken place elsewhere in the metropolitan region.
(Emphasis added)

Previously, IBO estimated that nearly 60 percent of the revenue would be new to the city's economy; now, apparently, there's a recognition of greater attrition among New Jersey fans. I've previously pointed out that a smaller number of New Jersey fans crossing state lines would result in lowered revenue. The IBO does not explain its calculations, however.

Nor does the IBO acknowledge the impact of the new arena in Newark, which opened in 2007, on the market for and revenues from non-basketball events in Brooklyn.

Elected officials

The elected officials who requested the report are Assembly Members James Brennan, Hakeem Jeffries, and Joan Millman; state Senators Bill Perkins and Velmanette Montgomery; and Council Members Letitia James and David Yassky.

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