Tax-exempt aid for new Yankee Stadium raises questions
BY KEITH HERBERT AND MICHAEL FRAZIER | email@example.com; firstname.lastname@example.org
July 2, 2008
More than two years ago, New York City and its Major League Baseball teams seized upon an innovative way to use tax-exempt bonds to help fund construction of the New York Yankees' new stadium in the Bronx and the Mets' Citi Field in Queens.
For the Yankees and the New York Mets, the public financing, with its lower interest rates for borrowing money, meant at least $147 million in savings for the Yankees over 30 years and $104 million for the Mets over 40 years, according to the Independent Budget Office, an independently funded, nonpartisan watchdog agency in the city.
But now, the playing field for such financing is shifting, even as the Yankees plan to seek another $350 million in what essentially is a government-subsidized loan for construction of their $1.3-billion arena.
Questions are being raised at both the federal and state levels.
In Washington, the Internal Revenue Service is contemplating a change that could block the Yankees from getting proceeds from the extra tax-exempt bonds the team says it wants to complete the new stadium.
In addition, a congressional subcommittee is asking the U.S. Treasury Department to explain why the financing for the Yankees and Mets was allowed in the first place and whether the IRS can change its regulations to more strictly limit publicly backed financing of sports stadiums. Rep. Dennis Kucinich (D-Ohio), who chairs a subcommittee of the House Oversight and Government Reform Committee, is leading the inquiry.
Here in New York, the prospect of additional public financing for the Yankees prompted Assemb. Richard Brodsky (D-Westchester), chairman of the Assembly's Committee on Corporations, Authorities and Commissions, to set a hearing today in Manhattan.
Is there a public benefit?
Brodsky, who last week called stadium financing "socialism for the rich," will aim questions at Seth Pinsky, president of the city's Economic Development Corp., the agency that put together the financing deal for the Yankees.
"What's the public benefit?" Brodsky said when asked what the committee, which has oversight of public bond financing, hopes to focus on at the hearing.
Pinsky said the project will boost the city's economy with the construction jobs and other revenue they bring.
"This is an amazing investment by the city," Pinsky said, referring to the new stadium in the Bronx. "The two major league stadiums being built today represent private investments of more than $2 billion in two underserved and deserving neighborhoods," Pinsky said.
Use of the public financing route stems from the fact that the Yankees don't own the land upon which the stadium is being built. The city does. Because the team doesn't pay any real estate taxes, the stadium deal hinged on compensation using payment-in-lieu-of-taxes, commonly called PILOT.
PILOT payments, however, usually are linked to real estate taxes, hotel taxes or sales taxes. In the Yankees' case, the PILOT is earmarked as a repayment of money for stadium construction borrowed by the city's Industrial Development Agency.
Without the tax-free government bonds to raise cash, the Yankees would have to shop for money via private financing and thus face higher borrowing costs.
City officials and the Yankees confirmed that they have been lobbying Treasury Department officials in Washington to persuade regulators not to make the change, and thereby continue allowing the PILOT funding mechanism.
Yankees president Randy Levine said the financing structure should remain unchanged.
"Our original transaction always contemplated completion bonds," Levine said last week. "We believe it's not fair to change course midstream of a transaction."
Controversial funding mechanism
The bond document signed in 2006 by the Yankees and the city provides that additional borrowing can be sought for the stadium's completion.
For the IRS, the funding mechanism has been a thorny question since 2006. Shortly after the agency approved the use of the PILOT method to pay for both New York stadiums, tax regulators proposed new restrictions on the use of PILOTs.
The proposed change in the IRS regulation, under consideration by U.S. Department of Treasury and IRS officials in Washington, also seems to be dousing the hopes of other sports-stadium developments, including the $950-million, 18,000-seat basketball arena for the Nets that had been planned as the jewel of Atlantic Yards, a residential and commercial development in downtown Brooklyn.
Andrew DeSouza, a spokesman for the Treasury Department, said the proposed change would affect bonds sold after Feb. 16, 2007.
"They haven't been finalized yet," DeSouza said of the proposed IRS changes. "I'm not saying that they'll change. But it's an important issue and we're going to continue working on it."
How budget breaks down
The new Yankee Stadium, rising next to the 85-year-old stadium in the Bronx, originally carried an $830-million price tag. Driving the cost to $1.3-billion are changes made to the original plans: upgrades to concession stands, a larger, high-definition scoreboard in centerfield and nicer luxury boxes.
About $942 million in tax-exempt bonds and $25 million in taxable bond financing are part of the Yankee Stadium deal.
The city also has contributed parkland for the new stadium, and the Metropolitan Transportation Authority plans to build a Metro-North station and expanded subway platform. The state is contributing the cost of parking-garage construction. A total of $300 million is estimated to be the public contribution to the project.
The Yankees organization has assured city officials that the new stadium will be completed regardless of any IRS changes.
Similarly, for the $632-million Mets stadium, a large portion of the cost - $528 million - also would come from tax-exempt bonds.
Jay Horwitz, a spokesman for the Mets, said he had no comment when asked if the Mets had plans to seek additional tax-exempt borrowing to complete Citi Field.
The Yankees' tax problem
TAX REFORM ACT
1986: This federal legislation removed stadiums from the list of private business projects that could be financed with tax-exempt industrial development bonds. In limited cases, however, the law allows tax-exempt government bond financing for stadiums as long as local governments subsidize construction using "generally applicable taxes," such as a sales tax, real estate tax or hotel tax. The rules were designed to ensure that the federal subsidy of tax-exempt-bond financing was targeted at low-cost financing for critical public infrastructure projects.
DEALS FOR NEW YANKEES & METS STADIUMS
2006: Both the New York Yankees and New York Mets win financing deals for new stadiums in which New York City's Economic Development Corp. issues tax-exempt bonds to raise $830 million for a new Yankee Stadium and $547 million for a new Mets stadium, Citi Field. The tax-exempt government bond financing allowed the city's Industrial Development Agency to borrow money at a cheaper interest rate, saving the teams millions. To get around the 1986 IRS regulations, the deal crafted by the city and the teams utilized a PILOT mechanism - that is, payment in lieu of taxes. For the teams, the payments are equivalent to the loan payments the city must make to retire the debt incurred to build the stadium.
YANKEES NEED MORE
February 2008: Planned upgrades to the scoreboard, concession stands and luxury suites spark the Yankees to seek an additional $350 million in tax-exempt borrowing via the city's EDC. The problem lies in potential revision of an Internal Revenue Service regulation - a revision proposed shortly after the Yankees and Mets got IRS approval for their tax-exempt financing in 2006.
STRICTER IRS REGULATION OF PILOTS COULD NIX MORE YANKEES' BORROWING
The proposed regulation under review by the U.S. Treasury Department and IRS would impose stricter interpretation of rules governing PILOTs. The proposed regulation would require PILOTs to be closely tied to "applicable taxes" such as a real estate tax, rather than a fixed payment - in the Yankees' case, a PILOT equal to the debt service on the bonds. The change could disqualify the Yankees from benefiting from further tax-exempt government financing via PILOTs. The Yankees are trying to persuade Treasury and IRS officials to drop the proposed regulation.
- KEITH HERBERT