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Subsidies in the City: Part II


Photo (cc) 2010 Courtney Gross

This is the continuation of "Subsidies in the City." For the first part of the story, go here.

For the most part, the recipients of IDA benefits could not be more satisfied.

Take Bob Usdin, the owner of Showman Fabricators in Long Island City. For 18 years, Usdin and his company had built sets for theater and television in Red Hook. In 2003, he said, financing from the IDA allowed him to relocate and purchase a building on Pearson Place in Queens.

Scenes from plays and television sets now line the walls of the new space -- a former perfume factory. In a huge, high-ceiled workspace, sets for Broadway's the Little Mermaid, Hamlet, CNN and Fox Business have been born. The setting for the White Houses press briefing room was constructed within these walls.

"If we hadn't gotten the financing and the tax breaks, we would have moved out to Jersey," said Usdin.

Despite these stories, advocates question whether the costs outweigh the benefits for some of the companies the IDA helps. For instance, on the whole, about 40 percent of projects that have received IDA benefits during the Bloomberg administration had not met their job projections as of fiscal year 2009, including Showman Fabricators. About one in four actually lost jobs between the year they started and fiscal year 2009, according to an analysis by Gotham Gazette.

Given the economy, it isn't surprising that some companies have lost workers. Overall, IDA projects approved during the Bloomberg administration have added about 30,000 jobs to the economy that weren't there before.

Nonetheless, some projects miss the mark.

When they first received benefits in 2002, Showman Fabricators had 126 jobs. Now, according to the IDA fiscal year 2009 report, it has 96. Usdin says his business has been hard hit by the economy, and companies shouldn't be penalized if they run into tough times.

"I think it should come down to whether the company is using good faith," Usdin explained in the facility's drafting room. And economic development, he said, is more than the number of jobs.

Photo (cc) 2010 Courtney Gross

"Jobs are definitely important, and that's probably the number one piece of it," he said. "But all the materials we buy. We do local vendors. Every person we employ here buys lunch and has an apartment," he added. About 70 percent of his employees, he said, live in the five boroughs.

A lot of IDA officials agree.

"Should it just be about jobs, no," said Andrea Feirstein, a mayoral appointee to the IDA board since 2007. "It isn’t just about the jobs. It's also about the cost benefit back to the city."

Only 5 percent of the deals approved under Bloomberg come with a job creation requirement -- so the vast majority have no penalty for losing workers. The IDA says for most of these smaller deals (projects that cost an average of $26.5 million), the agency is satisfied if the company finishes its capital construction and stays in New York. A job lost here or there, shouldn't kill an entire project, officials said. A job creation requirement for these companies would be a "poison pill," said one EDC official.

Another official put it this way:

"People get subsidized student loans. ... If you don't graduate, it's enough for the federal government that you went to school," said Kyle Kimball, executive vice president at the EDC. "It's kind of the same thing. We are providing a subsidy or a benefit, and it's enough for us that the physical transformation or the investment in the expansion in the industry has happened."

These benefits keep companies in New York, officials said, and deter the move across the Hudson.

More Requirements

But the question of what the public should get in return for its tax dollars doesn't end there.

Advocates, politicians and labor leaders want to see more from the companies that receive public subsidies. And in many circles that conversation includes requiring companies to pay a living wage.

"Economic development subsidies, they are investments that are made on behalf of the taxpayers, and it's important that we get the greatest benefits for those that have the greatest needs," said John Petro of the Drum Major Institute.

There are bills pending in Albany and at the City Council that would require the recipients of public tax dollars to pay a certain wage. The comptroller also expressed support for a requirement to force these companies to pay a living wage -- defined as $10 an hour plus benefits. The IDA, on the other hand, has not, arguing more restrictions would dissuade companies from applying for benefits.

In what some have interpreted as a truce, the IDA has embarked on a study to measure how living wage requirements would affect its economic development strategy. It is sending out a request for proposals this week and expects the study will be completed next year.

Nonetheless, some of the beneficiaries of IDA financing aren't signing on so soon.

"You're investing publicly backed financing for the construction project to happen, which as a result creates additional jobs, but I don’t believe you can (have) a living wage provision," said Coletti of the Building Trades Employer's Association. "You got minimum wage requirements."

The issue is likely to come up this year both in Albany and at City Hall. Its fate in either venue is unclear.

"Companies get X, and we pat them on the head and say fine," said State Sen. Antoine M. Thompson, who has introduced an IDA reform bill in Albany. "We have a situation where too often these organizations are not creating new jobs and just retaining jobs."

Thompson's bill also would require IDAs across the state (there are more than 115 of them) to mandate that at least two board members attend public hearings and establish criteria for job creation. It would also require IDAs to maintain a web site and prohibit board members from having business ties to companies that apply for benefits.

New York City's IDA already meets many of these requirements, and with the exception of the living wage provision, its officials have expressed support for many of them. From its perspective, the IDA would like to see its ability to fund nonprofits reinstated. Its ability to provide certain types of funding to nonprofits expired in early 2008, and officials said that has crippled them ever since.

During the Bloomberg administration, nonprofits comprised the largest number of projects the IDA financed -- even though its ability to do so was curtailed. About $2.5 billion worth of projects are reportedly held up, because of the state law's expiration.

A Profitable Future

The debate over jobs and economic development will likely heat up in the coming months as the city gets ready to pen another large deal.

Just last month, Mayor Michael Bloomberg and the chief executive officer of Jet Blue held a press conference at City Hall, announcing victory. New York City had successfully secured a deal for the growing airline to stay in New York instead of moving south to Orlando, Fla. A mini Jet Blue airplane model -- brandishing an "I Love NY" logo on its side -- was stage left. In the coming months, the benefits of the deal are likely to take center stage.

To stay in the Big Apple, the airliner could see a benefits package full of tax breaks and incentives worth more than $30 million.

A hearing on the deal will likely not take place for another six months, said an IDA official.

You can bet that, whenever it does, many will be watching.

Subsidies in the City: Part I


Photo (cc) 2010

The sounds of classic rock wafted from a Manhattan Laminates warehouse where stacks of plywood towered from the floor to the ceiling.

Upstairs three employees sat in a quiet showroom where brightly colored samples hung from the walls. A floor above several more employees worked in the accounting department -- a space that doubles as a crash pad for Manhattan Laminates employees, said the company's president, Kevin Brady.

In total, 10 people work full time at the 52nd Street location, selling woodworking supplies to architects, contractors and the average renovating homeowner.

And they get taxpayer subsidies to do it.

Six years ago, Manhattan Laminates received tax breaks from the city's Industrial Development Agency, the financing arm of the city's Economic Development Corp. In a deal that will span 25 years ending in 2029, Laminates has already received $197,000 in public assistance -- a subsidy cocktail of a mortgage recording tax exemption, a sales tax exemption and other tax relief. The financing came in exchange for expanding the business, which Brady says he has done -- though not entirely in New York City.

Since the deal, Brady has bought three other companies -- one of which is in Long Island.

"The entire catalyst was off of Manhattan Laminates," said Brady of his business growth. "If the IDA didn’t do what they did, this whole thing might not have happened."

The breaks for Manhattan Laminates represent just one miniscule piece of the millions of dollars in city subsidies approved by the Industrial Development Agency during the Bloomberg administration. Over the last seven years, hundreds of projects have collected more than $363 million in benefits -- from sales tax relief to a mortgage recording tax exemption.

While the IDA contends those benefits play an integral role in expanding the city's economy, some say the public is not getting its fair share in return. Advocates and labor leaders are pressuring the administration to adopt more stringent policies to force these companies to create jobs -- good paying ones. The new comptroller, John Liu, has established a task force to look into the agency's accountability. Meanwhile, as cash becomes tighter at City Hall, critics question whether these breaks constitute the best use of taxpayer resources.

Nowadays, these IDA deals come with a lot more than low-cost financing. They come with controversy.

Boosting the Economy

Six years ago, Manhattan Laminates was on the agenda.

Two months ago, it was Western Beef's turn. Western Beef, a supermarket chain that sports a cactus in a cowboy hat as a logo, was eyeing up to $5.5 million in tax breaks to expand and relocate a store to Webster Avenue in the Bronx -- a move it promised would bring more jobs and fresh fruits and vegetables to the area. According to its application, Western Beef, which owns 15 stores in New York City, projected it would ring up more than $400 million in retail sales from all of its locations in 2009.

As they do every month, the Industrial Development Agency's 15-member voluntary board met in a fourth floor hearing room downtown to determine the applicant's fate. As usual, there was a small crowd that included mostly the applicant's lawyers, clad in sharp, dark suits, and a handful of advocates.

A dozen members, including the owner of Willougby's, a photography store staple; a union head; an Anglican priest and the Bronx borough president's counsel, deliberated. The board -- to which the mayor appoints a majority of members -- had never rejected a project during the Bloomberg administration, according to the IDA. And it wasn't about to start with Western Beef.

Over the course of the Bloomberg administration the IDA has inked more than 320 deals. The majority of these projects provide low cost, tax-exempt financing to not-for-profits. Many deals include financing for small-scale industrial outfits and tax incentives for the city's dwindling manufacturing sector. The smallest number of agreements, which account for the largest amount of public assistance, go to large corporations, like the New York Yankees, the Mets or Metropolitan Life Insurance.

Those large agreements make up half of the assistance received from the IDA through fiscal year 2009. And only these agreements, which comprise about 5 percent of all IDA projects, come with job creation requirements.

In total, the projects in IDA's portfolio during the Bloomberg administration have amounted to more than $10 billion -- money that goes to construction jobs, along with steel and wood, to build new headquarters and the staff to fill them. In total, these projects added almost 30,000 new full-time jobs to the city.

Without the IDA's benefits, say supporters, many of those projects, and the jobs that go with them, wouldn't have happened.

Photo (cc) 2010 Courtney Gross. Image of Manhattan Laminates warehouse.

"The IDA creates secondary jobs for the economy," said Louis J. Coletti, the president and chief executive officer of the Building Trades Employer’s Association. "Without the IDA funding, a good portion of those projects probably wouldn't be able to move forward."

That is exactly the overarching rule governing the distribution of this unlimited public financing: The project would not be able to happen without it. That concept, critics counter, is interpreted quite liberally.

A Question of Benefits

With a few exceptions, most deals are approved with little dissent at the board, critics say.

That is, until recently.

Rewind to the IDA's board meeting in February. It was Comptroller John Liu's maiden meeting. He cast one of two votes rejecting the Western Beef proposal.

It would not be, however, the last time Liu or his proxy would vote against an IDA deal. Since taking office in January, Liu has committed to vote against every project at the IDA until, he says, he understands how projects are selected and if they are done so equitably.

"So little is understood about the process that it's even difficult to know what's troubling about the process," the comptroller said during a phone interview last week. "The EDC and the IDA vote will spell out what the benefits are. Is there any mechanism to ensure that those benefits are actually delivered?"

IDA officials say the process is clear: Every year, the board receives between 200 and 300 inquires about financing for private companies, from a behemoth Bank of America to a small Long Island City-based manufacturer. They all are looking for public assistance to expand their footprint (and, in most cases, their profits). In the last fiscal year, just 12 were approved. In fiscal year 2008, the board approved 42 applications, according to the agency.

IDA officials said the agency's board never rejects applications, because the staff has already weeded out faulty or unsustainable projects.

"Staff seriously considers not only whether a company wishes to pursue IDA benefits, but, also, whether IDA benefits can help them achieve their near-term and long-term objectives," EDC Spokesman David Lombino said in an e-mail. "Since applications cost $5,000, we discourage fledging industrial and manufacturing business from applying unless we believe they can present a strong application. Once applications are received, staff undertakes a rigorous review process."

But critics, including Liu, question the agency's accountability.

"The concept of the IDA providing subsides and tax breaks and low cost financing to companies in it of itself isn’t the problem," said Bettina Damiani, the director of advocacy group Good Jobs New York. "The question is: Is it being done fairly and efficiently and do New Yorkers get access to good jobs?"

Advocates like Damiani point to the large tax exemptions given to mega-corporations. Think the New York Yankees, who received more than $48.8 million in public assistance through fiscal year 2009 for its new stadium (The team received $942.5 million in tax exempt financing in 2006). Their deal with the IDA lasts until 2046. According to the IDA's latest job assessment report, that controversial stadium currently has 3,621 full time jobs -- about 1,300 more than the old stadium, according to one estimate.

Those that make it through the application process but fail to comply with their contracts are subject to penalties or have their benefits terminated. Larger projects, like the deal for Pfizer, have certain job creation targets. If they don't meet them, they have to pay for it.

Since 2002, according to the IDA, approximately 60 projects have had to give back or repay benefits, totaling $34 million.

Though none of this satisfies critics. For instance, Metropolitan Life Insurance received tax breaks in 2002 for a $273 million project. But the company shuffled employees from its Long Island City location to Midtown -- violating the terms of its IDA contract. At the start of its contract, the company had 1,750 employees, and last fiscal year it had 1,778. The IDA canceled all of MetLife's future benefits, almost $18 million in assistance, as a penalty, an IDA official said.

Damiani called it "a slap on the wrist." The same approach applies to other large contracts, like Pfizer's, Damiani said. Pfizer received benefits starting in 2003 as part of a deal to expand its Midtown headquarters and its payroll. Eventually the deal was terminated (canceling all future benefits) because the pharmaceutical giant reduced its workforce, officials said. Pfizer, according to the IDA, is still required to report to the agency, and the city is working to get some of its benefits back.

"The IDA has made steps forward in transparency and accountability," Damiani added. "The bulk of taxpayer resources have gone to large commercial programs. And many people wonder whether that was a wise investment."

To continue reading about the IDA and its job creation policies, see Part II here.

Council Contests 'Across the Board' Cuts


 

The City Council says it's time to pick favorites.

In its budget response released on Thursday, the City Council urged the administration to refrain from cutting agencies "across the board," and instead argued for a more selective slashing strategy. It also said it would try to save public safety and senior programs, but did not indicate where it would find the money to do that.

In arguing for a more selective budget cutting strategy, the budget response, a mandated document that follows the release of the mayor's preliminary budget and precedes the executive budget, contends "many agencies... may be reaching the point where they are no longer able to achieve their core missions and programs." The council suggests some departments have already been cut too deeply and should be spared, while other programs that are ineffective could be slated for elimination.

Councilmember Domenic Recchia, the council's finance committee chairman, said, "A smaller agency when they have to take an 8 percent cut, that's a larger cut for them."

Shortly after the response's release, the Bloomberg administration disputed the council's characterization of its budget cutting strategy. A spokesman said the administration asks every agency to reach certain spending reduction targets, and then picks which cuts should actually go into effect. The result, said Marc LaVorgna, a mayoral spokesperson, is agencies all end up with different levels of cuts -- all of which attempt to close an approximately $4.9 billion budget hole for the next fiscal year.

"Choices are prioritized and we try to produce savings, while having the smallest impact possible on the most important services," said LaVorgna. "And the numbers do reflect that."

For instance, according to Mayor Michael Bloomberg's preliminary budget released in January, the proposed cut to the police department is at 2.5 percent for fiscal year 2011, while the parks department faces a 10 percent.

Complicating matters, just last month City Budget Director Mark Page sent a letter to every agency warning departments to prepare for more cuts if the state budget included massive reductions in aid to the city. The letter asked uniformed agencies to prepare for 3.6 percent cuts and all other agencies to prepare for a cut of 7.2 percent. In that scenario, the Department of Education could see an additional cut of 2.7 percent.

That additional round of cuts, council officials said, could batter smaller agencies that are already struggling to meet demand. The administration should look at agencies that have been less seriously affected by the three years of budget reductions, officials said, and start cutting more there.

The Council's Priorities

In his preliminary budget, Bloomberg proposed to close 20 fire companies and reduce the police department's headcount by nearly 1,300 officers, bringing the number of officers down 1990 levels.

The council indicated it could try to block such cuts.

"We cannot allow improvements the city has made in public safety to be lost and set ourselves back to years past," said Council Speaker Christine Quinn in a prepared statement. "The council is going to make every effort to ensure that the impact felt by necessary additional budget cuts is as minimal as possible."

Though the council took issue with several areas the administration is attempting to cut, it did not propose any new taxes or new revenue streams. When asked if the council would consider raising some taxes later in the budget process, Recchia said it was "not likely."

The council does project the city will see $228 million more in revenue in fiscal year 2010 than the projection from the mayor's office. In fiscal year 2011, the council projected it would see $360 million more than the administration's estimates.

In comparison, the city's Independent Budget Office predicted in March that the city would see $170 million more than the mayor's projections for fiscal year 2011.

The mayor will release his executive budget in early May, and the council must approve a final budget by July 1.



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