Friday, May 20, 2011

The Miscalculations Encouraged By the Fuzzy Math of Subsidies: Yankee Stadium Bonds on Verge of Default- A Case Study

Noticing New York is not a fan of subsidies for sports venues like stadia and arenas. Even when the schemes behind those subsidies work out as the public officials dispensing them intended they tend to amount to crony-capitalism style transfers of more wealth to the already wealthy and connected. As in the case of the new Yankee Stadium they can replace taxpaying businesses with freeloading businesses exempt from the tax rolls. As in the case of the Atlantic Yards Prokhorov/Ratner basketball arena they wind up being significant net losses for the public. Add to all of this is the fact that these schemes may not even work out as public officials intended. They may work out a lot worse. To consider the implications of that point more thoroughly let’s direct our attention to a new Transportation Nation story about bonds issued to subsidize Yankee Stadium that are on the verge of defaulting: After Hundreds of Millions of Dollars of Public Subsidies, Barely Used Yankees Parking Garages Face Financial Collapse, May 19, 2011, by Jim O'Grady.

(The WNYC Transportation Nation story has also been substantially reprised in this WNYC story: Yankees Parking Garages Driven to Brink of Financial Collapse, Thursday, May 19, 2011, WNYC, by Jim O'Grady.)

Defaulting Bonds

The bonds issued in connection with Yankee Stadium that are in jeopardy of possible default are $237 million in tax-exempt bonds that were issued to finance a 21-acre parking garage complex for the new stadium. The stadium was subsidized by the public in multiple ways, not just by these parking garage bonds; other subsidized bonds were issued for the stadium itself. At the moment it's just these parking garage bonds that are in danger of default and not the other bonds financing the stadium directly. Those stadium bonds are presumably OK for now (unlike the bonds issued around the same time to finance the stadium for the financially flailing Mets) but the financial difficulties associated with the garage bonds highlight how the city’s public officials made a number of fundamental miscalculations when handing out these subsidies.

No Problem, Says Bloomberg

The Transportation Nation story includes information about Mayor Bloomberg cavalierly dismissing the screw-up:
Mayor Bloomberg says private bondholders, not taxpayers, will be on the hook if the Bronx Parking Development Company defaults on the bonds. On his weekly radio show, he shrugged off the Bronx Parking Development Company’s possible collapse.

“The city has no downside,” he said. “If they were to go bankrupt, it doesn’t hurt us. It wouldn’t be good for the project.”
Notwithstanding Bloomberg’s blithe dismissal, defaults on municipal bonds that are issued and promoted by the city administration are bad. Bad for the city, not just for the bond holders who also get shafted when things go wrong after the city convinces them to buy their product. When bond holders get shafted by a New York issuance, how do you think they will feel about buying bonds the next time a New York issuance comes out? Especially when you have a top city official like the mayor dismissing their interests, sounding like the mistake was all on the part of the investors who bought what the city was selling.

And, by the way, as we will be discussing, there is a long list of additional downsides for the city.

Who’s Watching?

This default was on the Forbes radar screen as of last fall: Yankee Stadium Parking Garage Bonds Are Among Shaky Muni Bonds, Sep. 21 2010 as well as that of the Bond Buyer, Yankee Stadium Parking Garages on Track for Default on $238M of Debt, Tuesday, September 14, 2010, By Ted Phillips and Crain’s, Yankee Stadium parking strikes out: Bronx outfit faces default on bonds as fans park elsewhere and residents fume, by Hilary Potkewitz, March 13, 2011.

The WNYC public radio stories note that the garages were also defended in 2006 by City Council Speaker Christine Quinn, Bloomberg’s regular comrade in crime when it comes to promoting developer-promoted over-development.

Underwriting Immediately Proved Wrong

The bonds were issued by the city’s Industrial Development Agency in 2007. That means that there was hardly the blink of an eye between the underwriting of the bonds and the proof, through failure, that the underwriting was terrifically wrong. The New Yankee Stadium opened in April of 2009, so the bonds took only the first two seasons to go bust, given that before that, during construction, interest on the bonds would have been paid out of capitalized interest (i.e. funds borrowed from the bond holders up front.) WNYC reports that the garage facility is $17 million behind in back rent and other payments owed to the city.

When the Fuzzy Wuzzies Come to Bear

The default is illustrative of a danger everyone should be on guard against when it comes to development through subsidies: Beware of miscalculation because those involved in development are likely to have put away their sharp pencils. Subsidies, generate fuzzy math, fuzzy thinking and they take peoples' eyes off reality and real costs. Those who are expert at working City Hall to finagle subsidies do not necessarily have the same skill sets as those who know how to shave a profit out of the real world, and frequently there is also the danger that their thinking is that if and when they are off on their numbers they will be patching things together at the back end with additional subsidy flows, perhaps with a “too big to fail” argument. That seems to be the case with Atlantic Yards. (The latest about Atlantic Yards fuzzy math was reported upon by Atlantic Yards Report yesterday.)

In the case of Atlantic Yards, say for example with the mega-project’s implausible initial job-projection numbers, fuzzy math is cultivated as a habit to get a foot in the door for what would otherwise have been an unacceptable project. Atlantic Yards' false projection of a ten-year build-out rather than a multi-decade build-out is another example.

Listing, We Sink With Miscalculations

So what were some of the miscalculations made with respect to the issuance of these now defaulting bonds for the new Yankee Stadium complex? Here is a list:
1. That there was no need for 9,000 parking spaces* in the eleven garages in the onsite complex directly serving the stadium. (With the stadium’s reduced 50,287 seat capacity- the reduction was between 4,561 and 7,459 seats while 2,000 parking spaces were simultaneously added- that’s one parking space with the new configuration for every 5.587 seats for a baseball game. And games are not selling out.) WNYC reports that on game days the garages are two-thirds empty and Crains reports they have never been more than 60% full. This is an odd miscalculation for officials serving the public to make in a city where the policy should be to encourage mass transit and discourage the onslaught of vehicular surges through stadium neighborhoods. (Atlantic Yards planning is similarly biased toward providing parking spaces.)

(* It should be noted that of the 9,000 parking spaces there were 250 additional parking spaces, previously intended for “public use” that were given to the Yankees “for the private use of Yankees officials, players and others” so that the Bloomberg administration “intent on obtaining a free luxury suite for its own use” could get a suite with twelve seats. Because the city and state codes governing public official ethics are different, this was not technically an ethics code violation although Governor Paterson’s obtaining a set of free tickets to a Yankee game was and consequently earned him a $62,125 fine. The overriding caveat, however, is to beware of public officials obsessed with using the office they hold to attend sports games for free.)

2. That the new, more expensive stadium parking would be attractive enough at the new, more expensive prices to attract sufficient utilization to support the bonds. Was that a good bet when they underwrote the bonds in 2007? In spring of 2009, concurrent with the first season’s opening, Noticing New York reported on the skepticism of two old-timers, both baseball scouts. They thought $29 was too much to charge for parking (Sunday, March 15, 2009, Inside Baseball.) The price of parking has recently been hiked to $35, probably worsening the situation. Will we now see a vicious cycle of price hikes intended to compensate for low utilization?

3. That other existing cheaper local private sector garage and parking facilities wouldn’t out-compete the subsidized Yankee garage facilities. (WNYC reports competitors are charging as little as $15.)

4. That high prices wouldn’t cause those who do drive to the stadium to roam the streets looking to usurp the street parking that was previously available to those who live in the neighborhood. This part of the miscalculation nullifies some of the environmental assessments made when the new stadium was first considered and winds up being contrary to assurances that Yankees president Randy Levine offered the City Council during at least one public hearing.

5. That the alternative transportation options provided by the new Metro-North stop added next to the stadium as part of the reconfiguration wasn’t essentially a duplicative and conflicting public investment.

6. That having all of this unutilized new parking infrastructure was more desirable as a public investment than the alternatives that were available. Some of the alternatives:
a. New York State didn’t need to spend $70 million in taxpayer dollars to build Parking Garage B, the private VIP garage with direct access into the stadium. Using the way-back (time machine) capabilities of the Internet (and their inventory of previous posts) to hold everyone accountable to the facts and a consistent story, No Land Grab pointed out that in 2006 “discredited” “sports economist” Andrew Zimbalist Jr., wrote in a New York Times Op-Ed that “all parking revenue would go back to the state and more than pay off the investment.” - One more fuzzy math miscalculation.
b. The neighborhood public parks and trees sacrificed to create the parking could have been kept instead. 377 mature oak trees might have been kept or at least some of them. 25.3 acres was taken. The "replacement" parkland for the community includes space on top of one of the stadium's parking garages, some already mapped parkland, and a patchwork of other plots ranging up from less than a half acre in size.
c. The city wouldn’t then have to be paying all of the $195 million it is supposed to be paying to replace parkland it gave to the Yankees.
d. The local community needn’t now be dealing with the fact that the “replacement” parkland has been slow to materialize and inferior.
A Jane Jacobs Digression

In her The Economy of Cities, urbanologist Jane Jacobs at one point digresses as she is discussing how new kinds of work evolve out of previously existing tasks and occupations. One of Jacobs' themes in this book is her endorsement of cities for their ability to foster these new, generally productive, ingenuities but she cautions that while it is ordinarily a good thing that new trades can evolve from old ones, the particular evolutions that result are not always to be desired. As she declares (page 54) not all the results are necessarily “useful, legal or innocuous.” In a long list she catalogs examples of things that are not “useful, legal or innocuous” and includes police that take bribes (or burglarize) and government officials who stuff ballot boxes and to this list she adds:
some city-planning departments take to scouting out and processing profitable deals for favored real-estate operators and also to organizing and running fraudulent “citizens’ organizations” to help overcome public opposition.
This observation can be readily adapted to say that while the work of government officials administering subsides may, when they start out, be doing the job of serving the public (a useful and desirable vocation), when they become captives of the development industry they have embarked upon a qualitatively different kind of pursuit (one that isn’t useful or innocuous and may not even be legal). When the miscalculations associated with administering subsidies become profuse as with the list above perhaps it is time to believe that the administering public officials have transitioned into the captive class. (Consider the concept of “Agency Capture.”)

In the End the Community Pays the Price

The WNYC Transportation Nation story begins and ends with an anecdote about a local community high school varsity baseball team that can no longer play its games in the community because the Yankees built one of their parking lots on the field where the varsity team used to practice and the team is still waiting for promised replacement fields. Jim Dwyer of the Times also wrote about how the varsity team now buses out of the community to its games. (About New York, Yankees Claimed a Park; Children Got Bus Rides, October 23, 2009. Putting the miscalculations in terms of the losses to the community and public is really the only way to put appreciate what the miscalculations actually mean.

Here is a cruel irony about how badly the local community has been shortchanged that may be added to the list of miscalculations- - it doesn’t seem to have been noted in any of the coverage to date: Since some of the “replacement” parkland for the community includes space on top of one of the stadium's parking garages, the community might now stand to lose that parkland (as inferior to the original replaced park as it might be). As Crain’s notes, “A default could set up a seizure by bondholders and would leave the garages' future in question.” Presumably the future of that parkland as well.

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