Memo suggests ESDC overstated AY economic benefits by assuming 10-year buildout, office space on track, full 8 million square feet
So, how credible are the rosy figures for jobs and tax revenues stated in the Empire State Development Corporation's (ESDC) "Economic Benefit Analysis" for Atlantic Yards ?
The numbers conveyed in a 9/17/09 memo from ESDC President Dennis Mullen to the board may sound good, but a look at the backing document--received via a Freedom of Information Law request--shows numerous holes in the analysis. (Both are embedded at bottom.)
1) Timing. The calculations of new tax revenue rely on a ten-year buildout of the project, which is highly unlikely. No alternative calculations or assumptions were provided, despite the likelihood, as even supporters such as then-ESDC CEO Marisa Lago have said, the project would take "decades." The Development Agreement allows 25 years, plus extensions.
2) Office jobs. The new tax revenue--as we learned back in 2006--relies significantly on office jobs, which are highly unlikely to come online within ten years.
3) Size of project. The revenue relies on a full buildout of the project, nearly 8 million square feet. But the development agreement allows for a much smaller project, less than 5.2 million square feet.
4) Costs underestimated. The costs are most likely underestimated and there's no effort to explain the calculations.
There are other fudges, such as an increase in the amount of commercial space.
(Previous calculations also relied on the same assumptions about a full buildout over ten years.)
Confusing moments
While the backing memo provides various statistics and assumptions, it scants on explaining how many of the totals are calculated.
And, oddly enough, the Mullen memo and the backing document offer significantly discrepant statistics regarding the projected number of jobs, even though both documents are dated the same day.
That's probably because the Mullen memo was based on a different document, since the backing memo states:
From Mullen's memo to the board:
These numbers contrast to two analyses produced by the ESDC in 2006, in July and then December, in two versions of the General Project Plan.
Construction jobs: In July 2006, it was 15,344 new direct job years and 26,803 total job years. In December 2006, it was 12,568 new direct job years and 21,976 total job years. The new numbers are 16,427 new direct job years and 25,133 total job years.
Personal income/construction: In July 2006, it was $721.0 million in direct income and $1.5 billion in total income. In December 2006, it was $590.0 million and $1.2 billion. The new number, in the Mullen memo, is only the total, $1.414 billion. Nor does the backing memo break out direct income; it estimates the total at $1.4 billion.
Total construction employment taxes: In July 2006, it was projected to generate $50.4 million in city personal income taxes and sales taxes and $109.5 million for New York State. In December 2006, those numbers were $42.1 million and $89.9 million. Now the numbers are $57.6 million and $94.1 million. However, the backing memo refers to "construction-related activity and employment," estimating the totals for the city at $210 million and $171 million for the state.
Permanent jobs: In July 2006, AY was projected to support an annual average 6,573 new jobs in New York City (direct, indirect and induced) and an annual average 7,378 jobs in New York State. In December 2006, the numbers were 4,538 new jobs in the city and 5,065 jobs in the state. Now the numbers are 3,998 new City jobs and 4,277 new state jobs, at least according to the Mullen memo--but see below for contrasting information from the backing memo.
Revenues, in present value: In July 2006, the Project was estimated to generate $845.5 million of City tax revenues and $1.1 billion of State tax revenues, thus $1.4 billion in net tax revenue after the subtraction of public costs. In December 2006, those figures were $652.3 million, $745.3 million, and $944.2 million in net tax revenues--a dramatic decline that drew headlines, with the explanation that it was based, at least in part, on reduced office space.
Now, as presented in the Mullen memo, the figures are $657.6 million in New York City tax revenues and $794.7 million in New York State tax revenues, or $1452.3 billion--nearly $55 million more than the December 2006 figures. But where's the net tax revenue? It's not in the Mullen memo.
A new look at total revenues
Is net tax revenue in the backing memo? Yes, but the figures are completely different--$624.7 million in New York City tax revenues and $738.9 million in New York State tax revenue, plus the construction-related taxes, for a a total of $1,744.1 billion.
Subtract $565.7 million in costs and the memo touts $1,178.4 billion in net revenue, significantly more than December 2006 but significantly less than July 2006.
What about costs?
The total fiscal costs are currently estimated at $565.7 million, not dissimilar from the $554 million in public improvements and infrastructure cited in 2006.
But that new number seems like a lowball figure, because it includes $120.7 million in affordable housing subsidies, which were not mentioned in the previous total. The calculation behind the costs is presented sketchily.
And, of course, there's no mention of the cost to federal taxpayers, who are supporting the project with well over $100 million in arena bond tax exemptions.
In other words, it's a mess.
The backing memo
The memo contains several questionable assumptions and analyses. Note, for example, that the 165,000 sf assigned to a hotel has instead been shifted to commercial use.
While a hotel may be even less viable than office space, given the number of hotels in the pipeline (40, according to the 1/28/10 Brooklyn Daily Eagle), there's no explanation why additional office space is viable.
Construction impacts
The analysis assumes that construction would be concluded by 2019. No alternative analysis is provided, despite the unlikelihood of the decade-long buildout, given.
New jobs: discrepancies
As noted, there's a significant discrepancy between the number of jobs noted in Mullen's memo and the number cited in the Economic Impact Analysis, even though both are dated September 17, 2009.
As noted at right, Mullen's memo estimated 3,998 new jobs in New York City and 4,277 new jobs in the state.
(Click on graphics to enlarge)
However, as noted at left, the backing memo predicts 5,150 new jobs in New York City and 5,498 jobs in the state.
Income tax revenue & office jobs
The total personal income of arena and mixed-use development wage earners is estimated at $7.7 billion for the city residents and $10 billion in the state. That means $624.7 million in new tax revenues for the city and $738.9 million for the state.
But what if there aren't nearly as many office jobs as expected? After all, the majority of jobs in the mixed-use development--1804 of 3040--would be office jobs.
And developer Bruce Ratner told Crain's New York Business in November 2009, “Can you tell me when we are going to need a new office tower?”
There are no penalties in the development agreement regarding failure to construct an office tower.
Cost-benefit analysis
The brief section that purports to analyze fiscal benefits and costs concludes that the city and state, combined, have a more than 3-1 fiscal benefit to cost ratio.
But the analysis is quite different from that of the New York City Independent Budget Office, which in September concluded the arena would be a net loss to the public.
The state analysis, for example, does not address certain costs, such as the arena property tax exemption or the opportunity cost of the transfer of city property and streets to the developer. Nor does the state analysis attempt to estimate additional costs for education, sanitation, police, and fire services.
The state analysis does, for the first, time include New York City Housing Development Corporation subsidies for affordable housing, but states: "This amount reflects only the subsidy for 1,677 affordable rental units at $72,000 a unit."
This is confusing. There would be 2250 affordable units; however, apparently only some of those units--those for households earning under 130% of Area Median Income (AMI)--would get a NYC HDC subsidy. It's unclear where the subsidy for the other units would come from.
Arena/team revenues
While the memo on page 5 offers several assumptions used in estimating impacts from Nets and arena operations--average salaries, ticket revenues, tax rates--no calculations are provided.
By contrast, a 2005 analysis by the New York City Economic Development Corporation (NYC EDC) at least tried to explain the methodology.
New jobs in housing overstated
In the mixed-use project (outside of the arena), the ESDC memo analysis estimates 1804 new office jobs, 823 retail jobs, 92 parking jobs, and 322 building services jobs in the apartment towers.
Again, that's overstated. The jobs in the apartment buildings--one job per 20 units--would be diminished if the announced 6430 units were not built, or not built in ten years. Given that incentives and damages mainly apply to just the first three towers, it's a very good bet that the 6430 units would not be built out in a decade, if at all.
New office jobs overstated
Moreover, the total of 1804 office jobs is very likely overstated. First, as noted, there's no market for office space in the near term.
Second, the amount of office space has likely been inflated, given the addition of space once meant for a hotel. (It's more likely that the hotel space would simply be subtracted from the project.)
Third, the ESDC's analysis becomes confounding when looked at closely. The stated 501,000 sf of office space would accommodate 2004 jobs at the stated 250 gross sf/job.
So why does the memo list 1804 direct office jobs? Because occupancy is estimated at only 90%.
Fine, but what does it mean to say, "Direct commercial office jobs were adjusted by 75% to account for New York City residency and to take into account that not all new office space will be occupied by new businesses coming from out of state"?
Where and how is the 75% adjustment applied? Not to the number of jobs. To the tax revenues? Unclear.
What is clear is that the NYC EDC, in its memo estimated that "only 30% of these jobs...are new to the New York economy." Does the ESDC agree?
(Also keep in mind that NYC EDC apparently updated its 2005 analysis, but in December refused to release it.)
The bottom line
The fact remains: no one has done a credible cost-benefit analysis of the project as a whole. The IBO has come closest, given its study of the arena, but that's not very close.
Nor has anyone done a cost-benefit analysis based on multiple timetables and scenarios, such as a 25-year buildout or the absence of office space.
And if a non-economist like me can poke so many holes in the memo, what would peer reviewers do?
MGPPBoardMemo090917
The numbers conveyed in a 9/17/09 memo from ESDC President Dennis Mullen to the board may sound good, but a look at the backing document--received via a Freedom of Information Law request--shows numerous holes in the analysis. (Both are embedded at bottom.)
1) Timing. The calculations of new tax revenue rely on a ten-year buildout of the project, which is highly unlikely. No alternative calculations or assumptions were provided, despite the likelihood, as even supporters such as then-ESDC CEO Marisa Lago have said, the project would take "decades." The Development Agreement allows 25 years, plus extensions.
2) Office jobs. The new tax revenue--as we learned back in 2006--relies significantly on office jobs, which are highly unlikely to come online within ten years.
3) Size of project. The revenue relies on a full buildout of the project, nearly 8 million square feet. But the development agreement allows for a much smaller project, less than 5.2 million square feet.
4) Costs underestimated. The costs are most likely underestimated and there's no effort to explain the calculations.
There are other fudges, such as an increase in the amount of commercial space.
(Previous calculations also relied on the same assumptions about a full buildout over ten years.)
Confusing moments
While the backing memo provides various statistics and assumptions, it scants on explaining how many of the totals are calculated.
And, oddly enough, the Mullen memo and the backing document offer significantly discrepant statistics regarding the projected number of jobs, even though both documents are dated the same day.
That's probably because the Mullen memo was based on a different document, since the backing memo states:
This set of results supersedes those contained in the memo dated September 8, 2009.The ESDC board memo
From Mullen's memo to the board:
The Economic Benefit Analysis for the Project, as set forth in the Modified General Project Plan, has been updated and, as a result, it is now projected that additional construction jobs and additional tax revenues to the State and City will result from the Project. It is now projected that the number of jobs resulting from the operation of the Project will be somewhat reduced. The new projections result from changes in estimated Project revenues, a significant increase in the Project budget based on more current information, revisions to the ESDC model used to predict job creation and fiscal benefits (some of these changes reflect the impact of the economic recession, such as changes in wage rates) and additional information with respect to Project costs and subsidies.Comparison to 2006
Current projections are that the Project will have the following impacts during construction and for the first 30 years of operation:
(i) Construction of the Project will generate 16,427 new direct job years and 25,133 total job years (direct, indirect and induced);
(ii) Personal income related to construction activities is projected at $1.414 billion (direct, indirect and induced);
(iii) Total construction related employment will generate $57.6 million in New York City tax revenues and $94.1 million in New York State tax revenues;
(iv) Project operations will support 3,998 new City jobs and 4,277 new jobs in the State, inclusive of the City (direct, indirect and induced); and
(v) On a present value basis, the Project will generate $657.6 million in New York City tax revenues and $794.7 million in New York State tax revenues.
These numbers contrast to two analyses produced by the ESDC in 2006, in July and then December, in two versions of the General Project Plan.
Construction jobs: In July 2006, it was 15,344 new direct job years and 26,803 total job years. In December 2006, it was 12,568 new direct job years and 21,976 total job years. The new numbers are 16,427 new direct job years and 25,133 total job years.
Personal income/construction: In July 2006, it was $721.0 million in direct income and $1.5 billion in total income. In December 2006, it was $590.0 million and $1.2 billion. The new number, in the Mullen memo, is only the total, $1.414 billion. Nor does the backing memo break out direct income; it estimates the total at $1.4 billion.
Total construction employment taxes: In July 2006, it was projected to generate $50.4 million in city personal income taxes and sales taxes and $109.5 million for New York State. In December 2006, those numbers were $42.1 million and $89.9 million. Now the numbers are $57.6 million and $94.1 million. However, the backing memo refers to "construction-related activity and employment," estimating the totals for the city at $210 million and $171 million for the state.
Permanent jobs: In July 2006, AY was projected to support an annual average 6,573 new jobs in New York City (direct, indirect and induced) and an annual average 7,378 jobs in New York State. In December 2006, the numbers were 4,538 new jobs in the city and 5,065 jobs in the state. Now the numbers are 3,998 new City jobs and 4,277 new state jobs, at least according to the Mullen memo--but see below for contrasting information from the backing memo.
Revenues, in present value: In July 2006, the Project was estimated to generate $845.5 million of City tax revenues and $1.1 billion of State tax revenues, thus $1.4 billion in net tax revenue after the subtraction of public costs. In December 2006, those figures were $652.3 million, $745.3 million, and $944.2 million in net tax revenues--a dramatic decline that drew headlines, with the explanation that it was based, at least in part, on reduced office space.
Now, as presented in the Mullen memo, the figures are $657.6 million in New York City tax revenues and $794.7 million in New York State tax revenues, or $1452.3 billion--nearly $55 million more than the December 2006 figures. But where's the net tax revenue? It's not in the Mullen memo.
A new look at total revenues
Is net tax revenue in the backing memo? Yes, but the figures are completely different--$624.7 million in New York City tax revenues and $738.9 million in New York State tax revenue, plus the construction-related taxes, for a a total of $1,744.1 billion.
Subtract $565.7 million in costs and the memo touts $1,178.4 billion in net revenue, significantly more than December 2006 but significantly less than July 2006.
What about costs?
The total fiscal costs are currently estimated at $565.7 million, not dissimilar from the $554 million in public improvements and infrastructure cited in 2006.
But that new number seems like a lowball figure, because it includes $120.7 million in affordable housing subsidies, which were not mentioned in the previous total. The calculation behind the costs is presented sketchily.
And, of course, there's no mention of the cost to federal taxpayers, who are supporting the project with well over $100 million in arena bond tax exemptions.
In other words, it's a mess.
The backing memo
The memo contains several questionable assumptions and analyses. Note, for example, that the 165,000 sf assigned to a hotel has instead been shifted to commercial use.
While a hotel may be even less viable than office space, given the number of hotels in the pipeline (40, according to the 1/28/10 Brooklyn Daily Eagle), there's no explanation why additional office space is viable.
Construction impacts
The analysis assumes that construction would be concluded by 2019. No alternative analysis is provided, despite the unlikelihood of the decade-long buildout, given.
New jobs: discrepancies
As noted, there's a significant discrepancy between the number of jobs noted in Mullen's memo and the number cited in the Economic Impact Analysis, even though both are dated September 17, 2009.
As noted at right, Mullen's memo estimated 3,998 new jobs in New York City and 4,277 new jobs in the state.(Click on graphics to enlarge)
However, as noted at left, the backing memo predicts 5,150 new jobs in New York City and 5,498 jobs in the state.Income tax revenue & office jobs
The total personal income of arena and mixed-use development wage earners is estimated at $7.7 billion for the city residents and $10 billion in the state. That means $624.7 million in new tax revenues for the city and $738.9 million for the state.
But what if there aren't nearly as many office jobs as expected? After all, the majority of jobs in the mixed-use development--1804 of 3040--would be office jobs.
And developer Bruce Ratner told Crain's New York Business in November 2009, “Can you tell me when we are going to need a new office tower?”
There are no penalties in the development agreement regarding failure to construct an office tower.
Cost-benefit analysis
The brief section that purports to analyze fiscal benefits and costs concludes that the city and state, combined, have a more than 3-1 fiscal benefit to cost ratio.
But the analysis is quite different from that of the New York City Independent Budget Office, which in September concluded the arena would be a net loss to the public.
The state analysis, for example, does not address certain costs, such as the arena property tax exemption or the opportunity cost of the transfer of city property and streets to the developer. Nor does the state analysis attempt to estimate additional costs for education, sanitation, police, and fire services.
The state analysis does, for the first, time include New York City Housing Development Corporation subsidies for affordable housing, but states: "This amount reflects only the subsidy for 1,677 affordable rental units at $72,000 a unit."
This is confusing. There would be 2250 affordable units; however, apparently only some of those units--those for households earning under 130% of Area Median Income (AMI)--would get a NYC HDC subsidy. It's unclear where the subsidy for the other units would come from.
Arena/team revenues
While the memo on page 5 offers several assumptions used in estimating impacts from Nets and arena operations--average salaries, ticket revenues, tax rates--no calculations are provided.
By contrast, a 2005 analysis by the New York City Economic Development Corporation (NYC EDC) at least tried to explain the methodology.
New jobs in housing overstated
In the mixed-use project (outside of the arena), the ESDC memo analysis estimates 1804 new office jobs, 823 retail jobs, 92 parking jobs, and 322 building services jobs in the apartment towers.
Again, that's overstated. The jobs in the apartment buildings--one job per 20 units--would be diminished if the announced 6430 units were not built, or not built in ten years. Given that incentives and damages mainly apply to just the first three towers, it's a very good bet that the 6430 units would not be built out in a decade, if at all.
New office jobs overstated
Moreover, the total of 1804 office jobs is very likely overstated. First, as noted, there's no market for office space in the near term.
Second, the amount of office space has likely been inflated, given the addition of space once meant for a hotel. (It's more likely that the hotel space would simply be subtracted from the project.)
Third, the ESDC's analysis becomes confounding when looked at closely. The stated 501,000 sf of office space would accommodate 2004 jobs at the stated 250 gross sf/job.
So why does the memo list 1804 direct office jobs? Because occupancy is estimated at only 90%.
Fine, but what does it mean to say, "Direct commercial office jobs were adjusted by 75% to account for New York City residency and to take into account that not all new office space will be occupied by new businesses coming from out of state"?
Where and how is the 75% adjustment applied? Not to the number of jobs. To the tax revenues? Unclear.
What is clear is that the NYC EDC, in its memo estimated that "only 30% of these jobs...are new to the New York economy." Does the ESDC agree?
(Also keep in mind that NYC EDC apparently updated its 2005 analysis, but in December refused to release it.)
The bottom line
The fact remains: no one has done a credible cost-benefit analysis of the project as a whole. The IBO has come closest, given its study of the arena, but that's not very close.
Nor has anyone done a cost-benefit analysis based on multiple timetables and scenarios, such as a 25-year buildout or the absence of office space.
And if a non-economist like me can poke so many holes in the memo, what would peer reviewers do?
MGPPBoardMemo090917
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