Monday, December 15, 2008

Stadium Finance: Mayor, Professing to Know Numbers, Should Know He Can’t Have It Both Ways (Unless He’s Keeping Two Sets of Books)

As a mayor who professes special financial expertise and an understanding of finance and the way numbers work, Michael Bloomberg should know that when it comes to stadium and arena finance he can’t have it both ways.

Premise for Tax-exempt Stadium and Arena Is Interception of Taxes: Ergo Two Choices

The whole premise for why bonds issued to finance sports stadiums or arenas can be tax-exempt is that the revenues used to support and pay the bonds are diverted city real estate tax revenues, intercepted before they go into city coffers. In other words, those diverted revenues pay for the stadium/arena bonds rather than being used for anything else for which the city might use sorely needed tax revenues.

Therefore, either:

1.) Stadiums and arenas are financed with diverted city real estate tax revenues and, accordingly, the stadiums and arenas are eligible to be financed with triple-tax-exempt municipal bonds;


2.) The city does not forego any substantial moneys because stadiums and arenas are not financed with diverted city real estate tax revenues and, accordingly, the stadiums and arenas are not eligible to be financed with triple-tax-exempt municipal bonds.
John Gambling Radio Interview: Mayor Wants to Have It Both Ways

Last Friday, (12/12), on the Live from City Hall with Mayor Mike and John Gambling radio show, Bloomberg was trying to have it both ways. He was disingenuously trying to sell the public on the idea that 1.) no substantial city tax revenues are being diverted to pay the bonds and 2.) that the bonds will still be tax-exempt.

If you listened to him he even made it sound as if he had done the calculations himself. If he did, then he did them wrong, or just wants to misrepresent the expense to the public (at 23:50):

It's not city money, other than we would forego the taxes- (Gambling interjects the "revenues") a little bit of revenue, it's a. . .if you do the calculations, it's a very small amount of revenue,- on the interest on those bonds.
Interception of Real estate Taxes Too Substantial to Ignore

In other words, Bloomberg is attempting to represent that bonds will be tax-exempt and that the only revenue the city will be forgoing is income tax revenue that won’t be paid on the bonds. He entirely ignores that diverting the city real estate taxes is the essential foundation and prerequisite for the bonds to be tax-exempt. The diverted real estate taxes are, in fact, the bulk of the tax revenues that will not be collected by the public. For instance, looking to Atlantic Yards arena calculations for some representative figures, when tax-exempt bonds are issued, 84% of the forgone tax revenue would be real estate taxes the city is not collecting.

(The actual total construction costs of the Atlantic Yards arena won’t be known at least until the bonds are issued. The estimated amount of those costs, which are escalating, may be disputable, but no matter what the costs are, the percentages for the underlying bond transaction figures will remain proportional. Assuming the cost of building the arena is $950 million, then the public subsidy costs, in descending order, add up as follows: $950 million as the present value of forgone city real estate taxes, plus $154.6 million in uncollected federal income tax, plus $14.16 million in uncollected state income tax, plus $7.75 million in uncollected city income tax This all adds up to $1.1265 billion.)

Percentagewise all the foregone tax revenue figures break down as follows:

84.33% Present value of real estate tax revenue (forgone by the city measured by amount city could raise with that same or equivalent income stream)
13.72% Federal income tax revenue (forgone by the federal government)
1.26% State income tax revenue (forgone by the state)
.68% City income tax revenue (forgone by the city)
In other words, in terms of foregone tax revenues associated with issuing the tax-exempt bonds, the city is bearing 85% of the burden (84.33% + .68%). These are just the subsidies related to issuing the tax-exempt bonds. In bigger picture terms, the Atlantic Yards arena is getting other public subsides: the MTA and the city are both giving land at below market value and sales tax won’t be collected. There are similar additional subsidies to consider in the case of the Yankee and Mets stadiums.

Why the Mayor Would Not Have Just Forgotten: What Was Crafted at a High Level
It hardly seems likely that Bloomberg should have forgotten about the forgone NYC real estate taxes or their magnitude. Among other things, the city went out on a limb to claim a very high tax assessment and real estate tax value for the Yankee Stadium property. (See: Monday, December 01, 2008, Brutally weird: Why a vacant lot in Alphabet City is (not) like the land under Yankee Stadium.) This required interagency contortions that must have involved coordination at a very high level in the Bloomberg administration. To get things done, no doubt there were some people attributing what was wanted to the mayor. (See: Saturday, October 25, 2008, Testy Kucinich presses city officials on “gaming” Yankee Stadium assessment; big disagreement over “smoking gun”.)

We have written that the numbers the administration came up with do not seem legitimate or honest and that the Yankee Stadium bonds therefore do not seem entitled to the tax exemption claimed. (See Wednesday, October 1, 2008, Safety in the Numbers You Pull out of a Hat and Saturday, November 8, 2008, Does Questionable Assertion of Attorney-client Privilege Point to Yankee Stadium Bond Taxability?)

Bonds; Taxable or Not? Can’t Have It Both Ways

If we are right, the city, with all its shenanigans, will have earned itself substantial potential liability and the dubious distinction of upsetting the tax-exempt bond-buying market with bonds becoming taxable. No doubt Mayor Bloomberg will assert that we are wrong and that the bonds are tax-exempt because taxes are actually collectable on the Yankee Stadium property. But once again, Bloomberg can’t have it both ways; either taxes are collectable on the Yankee Stadium property and the city is forgoing them, or there aren’t collectible taxes on the property, in which case the bonds are taxable.

Intercepted Taxes Ain’t Private $$

It doesn’t make sense for Mayor Bloomberg to argue that these diverted real estate taxes should somehow be disregarded as private payments. The way Assemblyman Richard Brodsky put it at a October 24, 2008 Congressional hearing was:

Congressman, the private payments are the taxes they owe. It’s as though you built an extension on the house and you said to the taxing authority: send my payments to the bank to pay off the mortgage. The notion that this is being paid for by the Yankees is delusional.
(See: Wednesday, December 10, 2008, Brodsky announces expanded inquiry into aid for stadium projects)

We said it similarly:

The setup is basically like paying taxes on your home and then having the government use that money to help you pay off your mortgage.
(See: Your 'Net' Loss, $2B in Taxes to Ratner, by Rich Calder)

Now does Bloomberg want to argue that these ‘synthetic taxes” are just fictional and would never be owed in the first place? Could it somehow be OK to make believe high taxes would be owed on Yankee Stadium because none of the imaginary taxes would ever be paid? Is there supposed to be some kind of notion that we just don’t charge taxes on big projects? Where then is the tax exemption for the bonds coming from?

More in the Gambling Interview: Atlantic Yards Report

It should be noted that the Bloomberg quote from the John Gambling show to the effect that “if you do the calculations, it's a very small amount of revenue” that the city is forgoing, comes from a longer segment of the interview about the Yankee and Mets stadium bonds. In that discussion Bloomberg misrepresented other aspects of the tax-exempt financing for the bonds. Norman Oder wrote about it in Atlantic Yards Report, pointing out some of Bloomberg’s mistakes and contradictions: Bloomberg: "Letting any group have a special deal is not what democracy is about," Saturday, December 13, 2008.

Bloomberg’s Fictional Federal Program: Really Quite the Opposite

One misrepresentation that Bloomberg made during the Gambling interview was that the stadiums were being financed pursuant to a federal “plan” and/or “program.” In fact, quite the opposite is the case. In 1986 Congress passed the Tax Reform Act of 1986 which took away tax exemption for private activity bonds that were used to finance stadium construction. According to Senator Daniel Patrick Moynihan, who was instrumental in getting those 1986 provisions passed, the subsequent "Issuance of [tax-exempt bonds] contravenes the clear and expressed intent of Congress." (See: Is the sun setting on tax-exempt stadium financing? Janet Ward, Oct 1, 1996.) Moynihan introduced a new bill in 1996 to prevent the post-1986 financings that were occurring knowing that Yankee and Mets stadium financing swould be prevented by his corrective legislation. (See: Moynihan's Tax-Break Bill Could Foil Dreams of Fields, by Thomas J. Lueck, July 14, 1996)

What Bloomberg describes as a program is regarded as merely a loophole the use of which by Bloomberg is all the more questionable because of his administration’s abuse of the real estate tax assessment process. (See: Monday, June 16, 2008, As IRS moves to close "loophole," ESDC fights for AY funding scheme.)

Fictional Federal Program has Fictional Bloombergian Purposes to Go With It

Having created a fictional federal program (which as noted above Bloomberg seems to theorize can be run with fictional real estate assessment figures), Bloomberg then ascribes a fictional purpose to the program:

Why does the federal government have a program? It stimulates construction jobs and economic activity. They might not do these things, build stadiums, or in this case some infrastructure around it, if it costs them more. The economics might not work.

. . . .we'll get less income from taxing the interest that the bondholders would pay, but in return there's more construction, more jobs, and that's good for society.
Stadiums and Arenas Don’t Provide Benefit. . .

The fictional purpose Bloomberg ascribes to the fictional program is especially off-base because the economics in this area don’t work. They fail the test of providing benefit on multiple levels. Stadiums and arenas are not “good for society” since the studies show that they don’t provide a net benefit for the particular localities that construct them. (See: Monday, July 14, 2008, FCR consultant Zimbalist (in 2003): "no rationale" for federal subsidy of projects like AY arena)

. . . And Financing Them Would Not Make a Good Federal Program

Even supposing that stadiums or arenas did somewhat benefit localities that get them, a program subsidizing the construction of stadiums and arenas would not make sense as a federal program. That is because the team ownership franchise structure limits the number of professional sports teams that can exist. Consequently, all negotiating power resides with the team owners who play localities off against each other. It is never a good idea when the entity to receive subsidy has all the negotiating power since that entity can pocket the subsidy giving little or nothing in return. That might be bad enough for any level of government handing out a subsidy; the reason subsidizing stadiums and arenas makes particularly little sense as a federal program is because as, Atlantic Yards Report quotes Assemblyman Brodsky testifying on the subject in October before Kucinich's subcommittee:

“There’s no value to the economy of the United States when the state of New York buys off a corporation to move from Pennsylvania.”
A Cynical Ploy? The Good of the Few Outweighs the Good of the Many Taxpayers?

In Bloomberg’s Gambling interview it is possible to detect that Bloomberg is trying to sell NYC residents the unattractive notion that the heavy government expenditures subsidizing the stadiums might be all right if it is “not city money” and the expenses are instead being footed by a higher level of government, federal or state. But how would that work? We are all of us, as New York City residents, part of each level of government and we should be expecting responsible conduct from every level of government of which we are a part. Even allowing that taxing the many to benefit a certain few might have a cynically selfish attraction, that attraction is completely dependent upon the identified few to whom such benefit will flow. Certainly benefits do not flow to the average New Yorker or even to the average sports fan: for one thing, these construction projects have only boosted ticket prices. (New Stadiums: Prices, and Outrage, Escalate, by Richard Sandomir, August 25, 2008) Who are the few to whom the benefit flow? In its coverage of the Gambling interview, Atlantic Yards Report provides the answer with this quote from Rep. Dennis Kucinich:

the practice of providing taxpayer subsidies to the building of sports stadiums is a transfer of wealth from the many taxpayers to the few wealthy owners.
Bloomberg, Professed Financial Expert, Getting It Wrong Because . . .

How could Mayor Bloomberg, who professes special financial expertise and an understanding of finance and the way numbers work, be so off-base about all of the above? Part of the answer may be that his financial acumen is overrated. We have made that case: Bloomberg Qualified Financial Crisis Leader? He Can Learn Says Schumer! Thursday, October 23, 2008 and More Discredit of Bloomberg as Qualified Financial Crisis Leader, Saturday, October 25, 2008. There are other possible contributing explanations. The mayor’s focus may be in the wrong place: Mayor’s Focus on City Planning Matters: Some Quantified Analysis, Wednesday, December 3, 2008. Or his motivations may have more to do with honoring deals he has made or commitments he feels he has to keep, perhaps in connection with contributions his charities have collected: Are the Atlantic Yards Land Grab and City Official Fraud Being Used to Finance Bloomberg’s Bid for Billionaire Term Limit Exceptionalism? Wednesday, October 22, 2008

Two Points From Atlantic Yards Reports as Cappers

The Atlantic Yards Report article on the Gambling interview (which is much shorter than this article) efficiently points out two other things of pertinence respecting the overspending of public monies on the stadiums.

First, in the interview, Mayor Bloomberg was able to talk at some length about how the MTA is short of both operating and capital budget funds without noting that a substantial portion of the gap of several hundred million dollars would be closed if the MTA were not selling its Vanderbilt Yard property to the Atlantic Yards developer for substantially less than the property’s market value.

Second, immediately on the heels of his pontification about the value of stadium financings where the stadium owners don’t have to pay collectable taxes, Mayor Bloomberg said:

The bottom line is that the state should collect the taxes. It is money we need, number one. Number two, letting any group have a special deal is not what democracy is about. It breeds contempt for our laws.
The only problem is that Bloomberg, having shifted gears, was now no longer talking about the stadium owners with whom he has struck deals to let them intercept, uncollected, all their “tax payments” to cover their private sports business expenses. Instead he was talking about New York State collecting cigarette taxes from Native Americans. (Bloomberg also spoke derisively about possible hard feelings that might exist concerning the acquisition of New York’s land from the original native population.)- Did we happen to mention that Mayor Bloomberg likes to have it both ways?- - Yes, that’s where we began. . .

Forewarned and Forearmed: “A Big Fat Pitch”

Here for perusal at length is the entire portion of the Gambling/Bloomberg interview where stadium finance is discussed (at about 22:40), aptly described by Atlantic Yards Report as “a big fat pitch” on the controversial issue:

JOHN GAMBLING: Speaking of things that are expensive, I'm reading that our stadiums, our baseball stadiums are getting more and more expensive, and they've looked for more money or the right to bonds, to rent. . loan bonds or let (Gambling probably meant to say “get the benefit of borrowing from an issuance of”) bonds . . . .

MAYOR BLOOMBERG: The issue here is the federal government has a plan where, and the city has an agency that helps decide who gets it, there are tax-exempt bonds, they typically are free of state, city, and federal taxes. And since they are, you can sell the bonds at a lower rate. So something like the Yankees or the Mets organization would like to use these bonds, 'cause the interest costs to them would be lower, so that’s why they want to do it…

Why does the federal government have a program? It stimulates construction jobs and economic activity. They might not do these things, build stadiums, or in this case some infrastructure around it, if it costs them more. The economics might not work.

So everybody says, look, we'll get less income from taxing the interest that the bondholders would pay, but in return there's more construction, more jobs, and that's good for society. It's not city money, other than we would forego the taxes- (Gambling interjects the “revenues”) a little bit of revenue, it’s a. . .if you do the calculations, it’s a very small amount of revenue,- on the interest on those bonds. So would the state, so would the federal government. But our development bank is set up to do this, and you do it for big projects, and the federal governments [sic] approve these projects, and we'll go on with them.

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