The city's new adopted budget, which took effect July 1st, is comfortably balanced, according to the latest reports by several fiscal monitors, who see little fear that the budget will become unbalanced during this fiscal year. The general tone of these reports is positive and complimentary, though they do see some large problems further down the road, and they make several important suggestions about what needs to be done.
But the city budget never sleeps. It is a 12-month process and the key budget makers - the mayor's policy and budget staff - tinker every day. Sometimes they do much more. In the first few weeks of the new fiscal year they have made two big moves with unknown implications for the city's future financial condition. The mayor and his economic advisers want to spend at least $500 million to buy the development rights of the MTA's West Side rail yards. More significantly for the long term, they are about to offer $650 million of tax breaks for developers who take on the Hudson Yards development project.
Reports from several fiscal monitors - the city comptroller's and the deputy state comptroller's and the state financial control board's - all say New York City's final budget for fiscal year 2007 improves the city's financial condition. Both the city and the deputy state comptroller's reports, for instance, like the retiree health benefits trust fund (which I've written about previously, with less enthusiasm.) The deputy state comptroller report approves of the increase in city reserve funds and the promise of pay-as-you-go capital funding (paying cash and thus avoiding interest costs from borrowing). The city comptroller singles out the hiring of 400 civilians in the police department to do jobs currently filled by higher-paid uniformed officers,
On the other hand, the reports aren't so optimistic for the longer term. There are the large budget deficits - the Bloomberg administration has projected $3.8 billion in 2008 and $4.6 billion in 2009, but the fiscal monitors think those numbers are low.
The state financial control board worries about a rapidly increasing capital budget: the city will enter into an "unprecedented" $12.5 billion of capital contracts in 2007 alone, and in just one year, from 2006 to 2007, debt service on city capital debt will grow by $743 million, or 18.1 percent, to reach $4.8 billion.
The control board also worries about the city's apparent failure to fund $2.5 billion of capital repairs identified by its own annual maintenance report. Such delayed maintenance creates unnecessary costs.
Other important suggestions come from the city comptroller's report, many of them about the way the city handles its contracts.
Bouncing back from last year's attempt to get the Jets a football stadium on land owned by the Metropolitan Transportation Authority, the mayor announced in early July that he wants to buy development rights to that same MTA site for $300 million -- the west rail yards leading into Penn Station -- and the air rights over the adjoining east yards for $200 million.
Such a purchase makes a lot of sense in terms of linking the sites to the larger Hudson Yards project (which covers, roughly, the West Side from Seventh to Twelfth Avenues between West 30th Street and West 42nd Street). The city would build a platform over the west rail yards as an initial step in developing the site; the city would sell the development air rights from the east rail yards to developers within the Hudson Yards project.
A second mayoral move in July regarding the Hudson Yards project is much more problematic. The city is authorizing across-the-board tax cuts for developers in the project area. This plan is intended to raise enough revenue, over time, to pay for the $3 billion in bonds that will be issued shortly to pay for the extension of the number 7 subway line to the Hudson Yards project area, new roadways, the purchase of the east rail yard air rights, and other infrastructure elements.
The city released the 19-page plan on Friday, July 28, and held a hearing on the plan, conducted by an arm of the mayor's Economic Development Corporation, entitled the Industrial Development Agency (a city financing agency controlled by the mayor), a few days later. The plan is oddly defensive in its introduction, noting that "development of Hudson Yards is not a foregone conclusion."
Not only does the project require rezoning (done) and the construction of the 7 line extension, but it requires "financial incentives…to make commercial development in this pioneering area feasible, particularly in the short run as the district matures."
The plan includes several kinds of tax breaks, but the heart of the proposal is the property tax breaks, through use of PILOTs, payments-in-lieu-of-taxes (Building Stadiums, Losing Revenue). The developers would pay these PILOTs, not to the city, but to the Hudson Yards Infrastructure Corporation. The corporation would use the payments to pay the debt service on the $3 billion of bonds it will issue. (The process is similar to the PILOTs that the Yankees and Mets will pay to another financing authority - instead of the city - to pay the debt service on their stadium construction bonds.)
The big question has always been: How big a discount on their property taxes would the developers in Hudson Yards be guaranteed? The Industrial Development Agency has a complicated answer. It depends on where and when construction takes place. Put simply, developers in areas of the Hudson Yards more to the east get smaller deals than those building to the west that presumably need a bigger incentive. Early developers get a better deal than later developers.
All these PILOT incentives add up to a $650 million cost (net present value) to the city over 30 years. The PILOT revenues would be approximately $1.8 billion during the same period. The overall Hudson Yards project, as projected in an earlier environmental impact statement for the whole project area, is expected to create 225,000 permanent jobs and $17.2 billion in private investment during the 30 years.
In testimony before the Industrial Development Agency on August 3, James Parrott, deputy director of the Fiscal Policy Institute and former chief economist for economic development for the city, said, "In my belief, the IDA does not make a compelling case that there is an economic rationale for across-the-board tax breaks that are needed to spur commercial development in the Hudson Yards area." He suggested that no recent market analysis has been presented to prove the need for committing significant tax breaks so well in advance of actual development.
Parrott said that what is really driving the Industrial Development Agency plan is not an inducement rationale for development, but a financing need: "I think this represents a perversion of the IDA purpose and authority. The city wants to move forward now with the off-budget financing for infrastructure improvements in the Hudson Yards area and is counting on a substantial amount of PILOT payments to secure that borrowing."
The proposal has one other interesting section: it describes the new city "development corporations" that will carry out the $3 billion Hudson Yards financing and development implementation. Both entities move decisions that will affect the city's future financial condition out of the normal budgeting process into less democratic institutions dominated by the mayor.
The Hudson Yards Infrastructure Corporation, for instance -- with five members: the mayor's budget director, two deputy mayors, the city comptroller and council speaker -- will approve and then carry out the financing. It is staffed by the mayor's budget office. The Hudson Yards Development Corporation, which will oversee the development itself, has 13 members, including the city comptroller and the council speaker, but is dominated by the mayor with eight seats.
One can support the general idea of developing the underutilized West Side of midtown and yet wonder why a financing plan needs to depend on thirty years of up-front, across-the-board property tax, sales tax, and other tax breaks. And wonder why the decision is being made in the middle of the summer, with only one public hearing and minimal public participation.
Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.Â
The New York City budget for fiscal year 2007, which began July 1, is a remarkable document on several fronts. It makes creative use of the huge $5.5 billion surplus from fiscal year 2006. Its highlights have won approval from most fiscal monitors. And it garnered praise from the press, which loved the unusually cordial budget negotiations between the new City Council speaker, Christine Quinn, and Mayor Michael Bloomberg. The New York Observer called Quinn "the perfect partner" for the mayor and their work together a "class act."
From a policy and process perspective, however, the adopted budget is less remarkable and more familiar. Once again the council allocated tens of millions of dollars for discretionary grants - so-called "member items," or "pork." (See related article.) More broadly, the adopted budget shows little progress toward a long-term structurally balanced financial plan. While the budget may "strengthen [the city's] financial position," as one fiscal monitor phrased it, the picture for future years remains cloudy. In fact, the plan projects deficits averaging $3.8 billion from 2008 to 2010.
Overall city agency spending remains essentially flat over the next four years, and the $52.9 billion budget for 2007 provides few new programs.
For example, the commitment to alleviating poverty announced in the mayor's January state of the city speechis backed up with little, if any, budget component. A private-public task force is meeting to prepare a plan, and the mayor has promised three pilot programs in high-need communities.
According to the Independent Budget Office's reporton the executive budget, social services other than Medicaid are slated to receive an average annual cut of 2.5 percent from 2006 to 2010. During the same period, Medicaid spending will increase an average of 4.0 percent a year, and children's services by 2.2 percent. But over four years, total health and social service spending, according to the executive budget, will increase by just one-tenth of one percent per year.
Similarly, the budget offers no major tax relief. It renews last year's $400 property tax rebate, but that goes to homeowners only, ignoring renters who pay a substantial part of a landlord's property tax through their rent. There is no move toward broader property tax reform.
The one big agency initiative is the hiring of 800 new cops and the transfer of 400 officers from civilian to uniformed jobs, a move many welcome as a sound management reform. Quinn added $10 million to the police department budget to provide bulletproof vests for officers.
In his report, the state deputy comptroller for New York City discussed how the mayor's Office of Management and Budget used the $5.5 billion surplus in 2006. The fund to provide health insurance for city retirees got $1 billion in the 2006 budget and will get $1 billion more in the 2007 budget. The Health and Hospitals Corporation received $385 million in 2006, which in a complicated exchange between the corporation and the city means the city will get back the money in future years, reducing deficits in those years.
The city placed in escrow $350 million it will owe the Transitional Finance Authority in 2008 for debt service on capital projects. This produced $16 million of interest in 2007 and will reduce debt service expenses in 2008 by that same $350 million.
Another $354 million of the surplus will go to pay 2006 and 2007 expenses that would otherwise be covered by money from the nationwide tobacco settlement. The delayed tobacco settlement revenues will then be available in 2008, reducing the projected deficit for that year.
These esoteric fiscal moves make for an interesting patchwork of budget-balancing that helps deal with fiscal problems over a one- or two-year period. They do little, though, to better match revenues and expenditures in the years beyond that.
In fact, according to the state deputy comptroller's report, the 2007 budget features its own "operating deficit" because the 2006 surplus paid billions in what would otherwise have been 2007 expenses. Without these prepayments, actual spending in 2007 would have exceeded revenues by $2.3 billion.
Fiscal analysts and monitors disagree about the scale of future budget deficits. The executive budget projected deficits from 2008 to 2010 of $3.6 billion, $4.2 billion, and $3.6 billion, respectively. The state deputy comptroller projected lower deficits: $3.1 billion, $3.8 billion, and $3.2 billion. And the Independent Budget Office was even more optimistic. In May it suggested figures for 2008 to 2010 of $2.5 billion, $2.9 billion and $2.6 billion - about $1 billion a year less than the city's figures.
There are some big uncertainties. The IBO, for example, noted that giving city workers wages increases to keep pace inflation would add $1 billion 2010 deficit. And the estimates do not include any contribution the city might have to make to a settlement in the Campaign for Fiscal Equity caseon school funding.
Although Quinnhas said she wants the council to become a more active participant in the budget process, the mayor continues to dominate key decisions.
Quinn has highlighted the cordial negotiations with the mayor and pointed to the council's success in setting a baseline for funding three programs of special interest to council members: extra library hours, 7,000 summer jobs for teenagers, and more frequent trash pick-ups in the outer boroughs.
But as worthy as these programs might be, the $50 million or so they represent is only a fraction of the council-backed programs that the mayor annually cuts.
The city's Office of Management Budget considers these programs one-year efforts, instead of part of a four-year plan. As a result, every year the council and mayor engage in a "budget dance": The mayor makes cuts in the programs, and council seeks to restore those cuts. This year's restorations, totaling about $233 million, do not look much different from those of previous earlier years, despite the $5.5 billion surplus.
Although the budget does include the money wanted for the bulletproof vests, the council did not get much of what it asked for. It requested $45 million for full-day universal pre-kindergarten, but instead got 2,000 more spaces - at a cost of $7 million. A $7.5 million request for child advocacy centers became a $2 million program.
By moving money some of the surplus into the health fund, the mayor, according to the IBO, removed that money from the give and take of the budget process. This apparently did not bother Quinn: The fund, she said, demonstrates "sound fiscal responsibility in planning for future health care obligations." This may be true, but it does give the mayor more control over the budget.
Quinn faces a daunting task if she hopes to give the council a great role in formulating the budget. She has far fewer resources and less staff than the mayor, whose budget office has decades of experience. This year with the previous speaker forced out by term limits, the speaker and the council's new finance division director did not assume their posts until after the OMB essentially completed the January preliminary budget. This may have weakened the council's budget role.
Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.Â
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.
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.
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.
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.Â