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The Mayor's West Side Gamble

by Glenn Pasanen
Sep 2004

Mayor Michael Bloomberg's plan for development of Manhattan's West Side looks more and more like a fiscal gamble of huge proportions. Moreover, the plan gives the mayor enormous discretion on financial decision-making, outside the normal process. Recent fiscal-monitor reports on the plan underscore the expensive, shaky, and undemocratic assumptions behind the plan.

According to these recent reports, the mayor is ready to commit the city to as much as $7 billion in financing costs for the plan's three components:

•  the expansion of the Javits Center

• the building of a Jets/Olympics stadium

• and several infrastructure projects, including the extension of the #7 subway line and a platform over the MTA's eastern rail yards.

The great bulk (if not all) of the financing will be set up by or through so-called public benefit corporations - in other words, public authorities controlled by the mayor that work outside normal democratic budget procedures. This will turn out to be very expensive. The new study by the Independent Budget Office entitled "West Side's Financing's Complex, $1.3 Billion Story," (in pdf format) points out that using the Hudson Yards Infrastructure Authority to finance the infrastructure, rather than the city's own capital financing, will cost an extra $1.3 billion.

But the most ominous part of this plan may well be the extraordinary and unaccountable power given the mayor through the new authority. This will minimize public discussion of risky assumptions in the plan, notably its optimistic projection that there will be a need in the future for 28 million square feet of office space as well as equally optimistic estimates of construction schedules and costs.  The plan therefore not only looks unnecessarily expensive to begin with, but has the potential for unknown major costs in the future.

Hudson Yards Infrastructure Authority

In separate proposed financing plans, the city in March 2004 promised $350 million for the Javits Center expansion - to be funded by Battery Park City Authority revenues - and $300 million (financing as yet unclear) for the platform over the MTA's western rail yards to support the stadium. Earlier, in February 2004, the mayor released his plan for the third and largest part of the West Side plan - the area to the east of the proposed Javits Center and stadium projects.  It's that part that would be financed through the new public corporation, the Hudson Yards Infrastructure Corporation.

The IBO's extensive study of the financing of that third  part of the plan highlights the way the plan avoids the normal capital budget process. The plan depends on paying off the borrowing costs through anticipated new revenues that would come from the new building.

Where will the money come from before the new building is completed? The plan solves this problem with a separate borrowing plan that pays the interest costs necessary before the new revenues kick in. A key point of the IBO report is that this transitional financing would not be necessary if the city simply paid for this part of the West Side project through conventional city general obligation bonds. (In such a case, the debt service would be paid from the city's operating budget.)

The short-term transitional financing (using so-called "commercial paper") adds some $630 million to the financing costs of the infrastructure project. Another $700 million in additional costs stems from the higher interest costs of using the Hudson Yards Infrastructure Authority bonds rather than city general obligation bonds, for a total of $1.33 billion in extra borrowing costs.

Undemocratic and Shaky Financing

The mayor is apparently willing to accept these higher costs because he does not have to go through the usual capital budgeting process, in which he proposes a capital plan and asks the City Council to authorize it through the city's annual adopted budget. The mayor here avoids the political conflict and possible defeat of his proposal.  As a report (in pdf format) by State Comptroller says, the mayor "has limited the involvement of the City Council and the City Comptroller, and circumvented the customary capital planning process."

A more esoteric part of the financing plan is the extensive use of negotiable financial mechanisms, such as payments-in-lieu-of-taxes (both property taxes and sales taxes), which are called PILOTS. What this means is that the mayor would have the power to negotiate taxes for potential developers. This would change the current way of doings things, where developers either pay the normal property taxes or take advantage of an already-existing tax-exemption program. There are arguments pro and con for such negotiated taxes, as the IBO report explains, but the mechanism certainly shifts more power to the mayor.

Another mechanism is the sale of development rights on the West Side through the re-zoning of the area. The assumptions here are that, 1. the re-zoning would be successful, and 2. that developers would pay a lot of money simply to get the right to build.

For the mayor's plan to work, the assumptions must in fact play out. If all of them do not, as a report by the City Comptroller (in pdf format) says, "there could be a potential impact on the city's operating budget." Or, as the Financial Control Board says (latest reports from the State Financial Control Board in pdf format), "Given the uncertainty of the projected revenue stream, it may be necessary for the city to provide additional credit support by pledging existing streams of revenues."  Translation: The city could be forced to bail out the West Side plan, at the expense of other priorities.  The mayor's attempt to avoid a role for the City Council could therefore backfire.

Among other worries that the IBO report describes are the failure to include the possible impact of Brooklyn development plans on the projections of future office use in Manhattan and the unacknowledged impact of likely non-profit office development in Manhattan. To the extent that non-profits - a recent and likely future area of economic development - buy into Manhattan property, their exemption from property taxes might lower anticipated tax revenues for the city.

The report says that if only two-thirds of the assumed revenues from these various mechanisms are realized, some $630 million in additional costs (over and above the $1.3 billion) would result.  Additional expenses for education, police, fire, transportation, and other city services necessitated by the new West Side development are also ignored in the financing plan, adding further pressure on the city's operating budget.

Mortgaging the Future

Using these financing mechanisms means that some of the debt will not be paid off until 2054, a fifty-year financing plan that gives the current generation the fruits, but asks future generations to pay the bill.

The uncertain fiscal implications of the West Side plan rest largely on the mayor's almost complete control over its financing. Given the fact of a mayoral election in little more than a year, a plan that imposes unknown costs on the city for the next 50 years deserves a broad public debate. The use of a politically insulated entity like the Hudson Yards Infrastructure Corporation is fiscally suspect and democratically unsound.

Glenn Pasanen, former associate director of City Project, teaches political science at Lehman College of the City University.

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