Thursday, July 22, 2010

NYC EDC cost-benefit analysis emerges: certain costs finally calculated, but fundamental flaws remain, as revenues based on full buildout in 10 years

Well, I've finally gotten a copy of the New York City Economic Development Corporation's (NYC EDC) updated Atlantic Yards fiscal analysis (aka cost-benefit analysis) and it's very much a mixed bag.

On the one hand, it's more responsible than the analysis released in 2005, given that it acknowledges a good number of costs. (In fact, the estimated net benefit to the city over 30 years is down more than 20%, from $524 million to $411.3 million.)

But it still suffers from some fundamental flaws:
  • it presumes a ten-year buildout, without assessing alternatives
  • it presumes a full buildout, without assessing alternatives
  • it ignores some opportunity costs and the costs of increased service provision
  • it (apparently) still counts income taxes from new residents
Too short

Moreover, the document, at three pages (versus its eight-page predecessor), is quite thin. While it provides overall calculations, it does not, as per the previous document, provide supporting calculations. (I had to ask to get some of the breakdowns.)

The document does not, for example, explain the difference in fiscal impact between four office towers and one tower. It should, especially since an Empire State Development Corporation analysis drastically lowered the fiscal impact in December 2006 in response to a reduction in office space.

Document emerges

Remember, the analysis was cited by NYC EDC President Seth Pinsky at a May 2009 hearing and promised a few days later. I criticized the previous document and asked for the updated version via a Freedom of Information Law (FOIL) request; in December, the request was denied.

Pinsky brought it up the analysis at a March 2010 City Council hearing and again at a hearing in May. (I'll discuss that testimony tomorrow.) His agency finally provided it this week to City Council Member Brad Lander, who passed it on to me.

It's clear that the document was not, in fact, available last June.

NYC EDC spokesman Dave Lombino explained, "We produced the updated cost benefit analysis late last year as we were finalizing the business deal with FCR. We released it to some press who inquired in March. I believe WNYC did something on it."

Well, I sure hadn't seen it.

While the initial document was dated 6/27/05, the follow-up document is undated, though, given that the fiscal impact is measured in 2009 dollars, it was presumably completed last year.

(The document I received, according to the Properties tab, was created 3/9/10 by NYC EDC Chief Economist Francesco Brindisi, though that's not conclusive.)

A changing AY program

The earlier version was based on the proposal at the time:
the Atlantic Yards project (“Atlantic Yards”) as proposed by Forest City Ratner (“FCR”), including the proposed Brooklyn Arena (“Arena”) and the surrounding mixed-use development (the “MUD”), comprised of 2 million SF of office space, 4,500 units of residential housing, 300,000 square feet of retail space, and 6 acres of open space.
The more recent document is based on an updated plan:
The development program herein represents the City’s determination of a reasonably likely build program consistent with the General Project Plan and Environmental Impact Statement. The proposal includes a 675,000 gross square feet (GSF) Arena to host basketball games and other events, 581,000 GSF of office space, 225,000 GSF of retail space, 150 commercial parking spaces (in addition to those required for the Arena), approximately 6,400 residential units and 8 acres of public space.
(Emphasis added)

What's likely?

Reasonably likely
? Well, that's the proposal, but a much smaller project is also reasonably likely.

For example, the 2009 Modified General Project Plan approved by the ESDC in September 2009 expects "up to 2.1 million gsf of residential use" in Phase 1.

However, the Development Agreement signed in December gives Forest City Ratner 12 years to build 1.5 million square feet of Phase 1. That allows for a smaller and slower project, and thus one with a lower return to the public.

I asked Lombino if NYC EDC considered multiple scenarios, such as a 15- or 25-year buildout, noting that, in October 2008, Port Authority of NY/NJ Chairman Christopher Ward reported on the rebuilding plans at Ground Zero, offering both a target date and a “probabilistic” date, based on computer analysis of all the many random things that might go wrong.

"The analysis assumes the timetable described in the EIS [Environmental Impact Statement]," Lombino responded.

There's a logic to that, but it's also misleading.

Why? Because the EIS was produced in 2006 and, while no Supplemental EIS was produced in 2009, the ESDC did produce a Technical Memorandum. The latter, while calculating that no SEIS was required (because the impacts would be attenuated--a debatable conclusion), did acknowledge the potential for a delayed buildout:
The delay of the full build out of the project would result in a delay in the realization of the full economic benefits of the project as disclosed in the FEIS.
While the Technical Memorandum analyzed only a five-year delay (a Build Year of 2024) regarding such things as traffic, a much longer delay is of course possible. The document also analyzed a potential four-year delay in the completion of Building 1, the main office tower.

It states that there would be no "significant adverse environmental impacts not already identified in the FEIS." Unmentioned, however, is that such a delay would further delay "the realization of the full economic benefits of the project."

The NYC EDC's bottom line

Here's the overall 30-year impact, from the 2005 document:

Here's the new calculation:
Notice a big difference? Only the newer document folds in costs to the city. Though that calculation is incomplete, as I'll show below, it's a significant change.

Perhaps someone at NYC EDC read my 6/2/09 critique after Pinsky's 2009 testimony pointing out the absence of costs in the 2005 analysis.

Looking more closely

I pointed out that footnote 1 refers to revenue that will be "unrealized," including sales taxes waived on construction materials, certain mortgage recording taxes, PILOT benefits in respect of actual real property taxes, and certain income taxes associated with tax-exempt bonds issued to finance the project, which are not to be collected in connection with the project.

Does the $681 million figure disregard such unrealized fiscal income, or does it calculate it, as suggested by the term "net"?

Lombino responded:
We did not simply disregard the taxes that comprise the “unrealized fiscal income.” Those values were calculated in the model and netted out of the gross benefit for the purpose of simplifying the summary table. While it is not explicitly shown in the table, the benefit gross of unrealized fiscal income was estimated to be $726.2 million. The $45.2 million of unrealized fiscal income that was netted out of that gross number breaks down as follows:
  • $9.4M for construction sales tax waivers
  • $18.2M for mortgage recording tax waivers
  • $8.2M in PILOT benefits
  • $9.3M in forgone income taxes associated with tax-exempt bonds issued.
In terms of how those values were calculated:
  • The construction sales tax waiver is estimated by assuming a certain percentage of the construction budget is spent on materials, and that amount was multiplied by the NYC sales tax rate and discounted according to our “net new” methodology.
  • The mortgage recording tax waiver is the product of the construction mortgage amount, the NYC MRT rate, and the appropriate net new percentage.
  • To estimate PILOT benefits, we estimated the amount of property taxes that would be due in the absence of a PILOT agreement (using DOF’s current AVs and assessment guidelines) and estimated fiscal revenue under the assumed PILOT agreement in which FCRC pays $1 from 2010 through the end of construction for each tower. After adjusting the values to reflect net new impacts, we took the difference of those two cash streams to arrive at the value of the PILOT benefits.
  • The forgone income taxes resulting from the bond issuance were calculated assuming a city income tax rate of 3.648% and 35% city ownership of the bonds.
Note that those numbers are both higher and lower than those calculated (below) by the New York City Independent Budget Office (IBO).

However, NYC EDC omits the $146 million in opportunity costs that IBO calculated regarding the arena property tax exemption:
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.
Direct and indirect city costs

The new NYC EDC analysis states:
As indicated in Table 1 and footnotes 2 and 3 above, the costs to the City of the Atlantic Yards project reflect City capital contributions, City-funded infrastructure improvements (some of which are not directly related to the project, but which have been included in the analysis in order to ensure that it is as conservative as possible), the subsidy implicit in Housing Development Corporation (HDC) second mortgages available to certain residential portions of the project (which are generally consistent with benefits available to other affordable housing projects in the City), and foregone fiscal revenues from the below-market sale or contribution of certain property interests (e.g., street beds that are to be demapped in connection with the project).

In reviewing the foregoing, it should be noted that many of the taxes deemed to be “foregone” herein would not be collected if the project were not to proceed and therefore could be argued not actually to be a “cost” to the City. However, to ensure that this analysis is as conservative as possible, all such foregone taxes are being treated as “lost revenue”.
As I've written, I think there's evidence that the $178.7 million total undercounts the city contribution, but I'll have more on that shortly.

Note that the IBO did not calculate the cost of housing bonds. Nor did it try to estimate the full costs of increased city services, though in 2005 it noted that, contra Forest City Ratner consultant Andrew Zimbalist, "costs to the city for policing the new Nets arena could be significant."

The NYC EDC did not estimate such new public costs.

Counting new residents

The new analysis states:
6 It was assumed that the residents and workers who are estimated to be new to NYC as a result of Atlantic Yards are two mutually exclusive population groups and thus, there should not be any double counting of fiscal impacts between the personal income tax and sales tax associated with households and the personal taxes calculated from onsite jobs.
The earlier analysis:
Given the current shortage of housing in New York City, the analysis assumes that all 4,500 new units to be constructed as part of the MUD will represent an equivalent increase in households Citywide, either directly in the project itself or as infill in units vacated by households relocating to the project.

Income tax revenue is based on an average income of $45,000, the Citywide average for all industries. This is consistent with the assumption that these units would be net new to the City overall, thus residents in these units are likely to be employed in any industry in the City. Total income was then escalated annually at a rate of 3.0% and adjusted to reflect the anticipated construction timeframe. The multiplier of 1.5 was then applied to the direct revenues to estimate indirect effects.

ALSO: The fiscal impact analysis, however, assumes that only 30% of these jobs, or just over 2,000 workers, are new to the New York economy. This number is equivalent to one medium-sized (500,000 sf) office building and is compatible with current estimations of the Brooklyn allocation of office-using employment from City-wide projections for employment growth. This assumption was also used in the analysis to address double counting of residents who both live and work in the mixed-use development and are already accounted for in the residential analysis.
That does seem to be a change, but either way, I think there's a major flaw.

If new residents are counted as an increase in taxes, any builder of speculative luxury condos would be an economic development titan simply by creating new housing--rather than creating jobs.

That has not, however, proven to be the case, given foreclosures and empty buildings, which is why economist James Parrott said, "I don't know of any serious cost-benefit analyses of mixed-used economic development projects that count the taxes of residents."


The new NYC EDC report states:
It should also be noted that, unlike the analyses that NYC’s Independent Budget Office (IBO) completed in 2005 and 2009, the analysis contained herein does not simply set the costs of the entire project against the benefits of the Arena portion only. Instead, this analysis includes a comprehensive assessment of costs and benefits of the entire project.
There's a fundamental methodological divide. The IBO stated:
Analytically, we are only interested in calculating the returns to the public fisc from the discretionary benefits being granted to this project above and beyond the as-of-right benefits that would be available to any developer at this site or elsewhere in the city. In the case of Atlantic Yards, the arena accounts for virtually all of the discretionary benefits flowing to the project.
And there's a practical one:
If Forest City Ratner used the maximum time available under the new modified project plan, construction could extend until after 2020. Given this uncertainty about the timing of completion of individual buildings and the ultimate timing for full build out, IBO has chosen not to estimate the fiscal impact of the full project over the next 30 years.

NYC EDC 2005 Atlantic Yards Analysis

NYC EDC Atlantic Yards Cost-Benefit Analysis 2009

NYC IBO Atlantic Yards Fiscal Brief September 2009

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