Rep. Dennis Kucinich (D-OH), who chairs Domestic Policy Subcommittee of the Oversight and Government Reform Committee, yesterday announced a hearing to be held September 18. It follows up on two public hearings the subcommittee held last year (3/29/07 and 10/10/07) that looked more broadly at some of the policy issues.
No witness list has been announced, but I assume someone from the New York City Industrial Development Authority, whose Seth Pinsky was on the hot seat July 2, will be among those present.
While no legislation has been proposed yet, the Subcommittee's concern may put pressure on the Internal Revenue Service (IRS) to clarify and finalize a proposed rule regarding PILOTs (payments in lieu of taxes) to finance sports facilities. That rule could stymie tax-exempt funding for the Atlantic Yards arena--or the city and state could succeed in getting the arena grandfathered in under the ruling that allowed funding for the two baseball stadiums.
The issues with PILOTs
The Yankees and Mets, with the assistance of New York City and State, gained "private letter rulings" (PLRs) from the IRS in October 2006 allowing an aggressive plan for tax-exempt financing. After financing for those stadiums was approved, the IRS issued a revised regulation that would eliminate what its chief counsel called a "loophole."
New York City and State would like to see the loophole extended for additional financing for the two stadiums, as well as for the Atlantic Yards arena, which officials contend should be grandfathered in under those old rules, given that it was proposed and proceeded long before October 2006. However, the project was not approved until December 2006.
Kucinich, who's no fan of tax-exempt financing for sports facilities in the first place, takes issue with the IRS's claim that it was compelled to allow the "loophole," which allows PILOTs (payments in lieu of taxes) used to pay off sports facilities to be assigned to fixed bond payments.
The proposed but not yet implemented IRS rule would require PILOTs to look more like actual taxes, meaning they'd fluctuate each year--a no-no for the bond market.
"Gaming" the valuations?
Kucinich is also looking into whether the valuation of the new Yankee Stadium was "gamed" so that the foregone taxes exceeded the expected bond payments, thus allowing the PILOT. Evidence has emerged that a high assessed value was used so that taxes exceeded PILOTs, but that a "much lower value was used when the city got the land appraised to satisfy a federal requirement to replace parkland with property of equal value," as reported by Metro.
Some similar questions have been raised regarding Atlantic Yards. As reported by AYR and cited by Develop Don't Destroy Brooklyn, available evidence suggests that the foregone property tax might be much less than the anticipated PILOT payment, thus leading to suspicion about whether the valuation of the arena would be "gamed."
Forest City Ratner expects a $800 million tax-exempt bond issue, which, by my estimation, would save Forest City Ratner $165 million. Based on the example of the Yankee Stadium bonds, an $800 million bond issue would require $48 million in annual payments.
However, as I wrote, there seems to be a discrepancy; 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.
The press release
The Domestic Policy Subcommittee of the Oversight and Government Reform Committee will hold a hearing, “Gaming the Tax Code: Public Subsidies, Private Profits, and Big League Sports in New York,” on Thursday, September 18, 2008, at 10:00 a.m. in 2154 Rayburn House Office Building.
This will be the third hearing held by the Domestic Policy Subcommittee examining whether the use of the federal tax code to subsidize the construction of professional sports stadiums and arenas furthers the public interest, and the first to examine alleged improprieties in the financing process.
Specifically, the hearing will address whether efforts to finance new stadiums for the New York Yankees and New York Mets and a new arena for the New Jersey Nets by issuing federally tax-exempt bonds advance the public interest; whether the U.S. Department of Treasury’s rulemaking has been consistent with the Tax Reform Act of 1986; and the legal, policy, and economic implications of the existing and proposed IRS rules regulating the structure of payments of lieu of taxes (PILOTs) permitted to finance projects funded by the issuance of federally tax-exempt bonds (i.e., the PILOT rule).
The hearing will also address alleged misrepresentations made to the IRS and investors related to the assessment of the new Yankee Stadium, whether these alleged misrepresentations affect the tax-exempt status of the bonds issued to finance construction of the stadium, and whether these alleged misrepresentations are an outgrowth of the incentives provided to state and municipal stakeholders by the PILOT rule.