Gotham Gazette

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After The Adopted Budget, Some Tinkering

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.

The Adopted Budget for 2007

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.

West Side Development and Financing

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. 

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