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Building Stadiums, Losing Revenue

by Glenn Pasanen, Jun 08, 2006
 

With the baseball season about a third over, New York fans can begin dreaming once again of a subway series. Certainly they have a lot to cheer about, with the Mets leading their division by several games and the Yankees neck and neck with their traditional rival, the Boston Red Sox.

Many fans (particularly those who frequent Shea Stadium) may also be applauding the new stadiums planned for both teams. But some of the financing arrangements for the new stadiums raise important questions.

One issue concerns the city’s recent reliance on so-called PILOTs (payments in lieu of taxes) to promote economic development projects such as the stadiums. The use of these payments raises questions about overall revenue projections for the city, Mayor Michael Bloomberg’s bold but curious priorities, and his ad hoc, unilateral style of executive budgeting. Further, the deals the city crafted to help the Mets and Yankees build new stadiums may be a model for the future, since PILOTs have been proposed as key to the city’s financing of West Side development.

What Are PILOTS?

The mayor certainly has the power to negotiate PILOTs with private developers and other property owners. But since such payments can cause the city to gain or lose hundreds of millions of dollars in potential tax revenues, critics believe the process needs a lot more discussion and transparency than it has yet received.

A payment-in-lieu-of-taxes is, at one level, a simple concept. To encourage economic development, the city agrees to accept a negotiated payment instead of the standard property tax. These payments are generally less than what the property's full value would normally dictate. The difference in payment -– the lost revenue to the city –- is technically called a “tax expenditure,” but most people would consider it a tax break.

Complex Deal With Yankees and Mets

Stadium financing in general -- and PILOTs in particular -- can be quite complex. Take the deals with the Yankees and Mets approved by the City Council in April. Although the teams will build the stadiums themselves, the taxpayers will pay for related items, such as parking lots and, at Yankee Stadium, new parks. According to the mayor, the city and state will spend about $235 million for the Yankees’ project and $180 million for the Mets’ stadium.

But the bill gets bigger when one adds in lost revenues. Up to now, the city owned the baseball stadiums and the land under them. The teams did not pay property taxes but did pay rent to the city. Good Jobs New York has said the Yankees rent totaled $26.43 million between 2000 and 2004, and the Mets paid $24.55 million in rent to the city over the same period. Admittedly much, though not all, of that was eaten up by maintenance costs, which the city paid under the old arrangement but will not have to pay under the new one. But now there will be no rent at all.

And there will not be a property tax either. While the mayor has objected strenuously to Madison Square Garden’s property tax exemption (which costs the city $12 million a year in lost revenues), the baseball teams also remain exempt from the property tax. The Yankees will therefore save -- and the city will lose in revenue -- $144 million over 40 years. The Mets will save $72 million. Such a major revenue decision deserved more debate than it got.

In addition, the Bloomberg administration's interpretation of federal law has led them to assert that the Yankees and Mets can use tax-exempt bonds to finance the building of the stadiums -- as long as they repay the bonds with PILOTS. Tax exempt bonds carry lower interest rates. And so qualifying for tax-exempt financing could save both teams a total of $216 million by one estimate, quoted in an explanation of this financing by Neil deMause in the Village Voice. For both teams, the Independent Budget Office has said the ability to use tax-exempt financing is the biggest single benefit in their stadium financing packages. Most of this cost, though, will be borne by the federal government, not the city or state.

But federal officials have yet to approve this tax-exempt financing. The IBO has told the City Council that allowing tax exempt financing “relies on an aggressive interpretation” of the federal internal revenue code. But it became clear at a City Council hearing this spring that, even if the federal government rejects the city’s argument -- which would require the Yankees and Mets to resort to more costly taxable financing -- the stadiums would nevertheless retain their property tax exemption.

Future West Side vs. Past Battery Park City Financing

Some see the stakes in these stadium deals dwarfed by those in the forthcoming West Side financing. The potential savings through the use of PILOTS to private developers –- and revenue losses to the city –- are vastly higher given the scope of that project’s residential and commercial goals.

As discussed in earlier columns , the city has proposed using an upfront, across-the-board PILOT for West Side developers, promising them they can pay some percentage (50 percent? 90 percent?) of their property tax bill.

A useful reference point here is the biggest PILOT deal in town -- the Battery Park City Authority. The authority has a 99-year lease on land owned by the city, and, as a state-authorized public authority, has the power to collect PILOTs from all commercial and residential owners in Battery Park City. These PILOTs are the equivalent of full property taxes that would otherwise be paid to the city. The city assesses all the Battery Park properties at full market value and the authority bills the owners for what they would owe.

The authority thus has a guaranteed revenue stream, which reached nearly $180 million in 2005, according to the city finance department. The authority uses the money primarily to pay the debt service on bonds that it has issued to pay for developing Battery Park’s infrastructure. After additional administrative and other costs have been paid, the authority sends the bulk of the surplus revenues to the city.

This annual payment to the city, which, rather disingenuously, is also called a PILOT -- but is a partial payment -- can vary substantially from year to year, depending on what the authority spends and saves in a given year. For instance, according to city tax expenditure reports, the PILOT from the authority to the city was $52 million in fiscal 2003 and $101 million in 2005.

The big difference between the Battery Park City Authority financing model and the proposed West Side model is that all Battery Park property owners pay full property taxes after certain time-limited abatements. And paying full freight has not slowed the enormous success of Battery Park City, even after the 9/11 attack.

Why then, based on the downtown record, would one structure West Side financing with a PILOT that is a fraction of full value?

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001. 


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