Thursday, January 26, 2006


The big unknown: Borough Board punts on fiscal impact of Atlantic Yards

It's one of the biggest questions--perhaps the biggest--surrounding the proposed $3.5 billion Atlantic Yards development: would this project be a winner or a loser economically?

The answer: we don't really know, beyond generalities, even though developer Forest City Ratner estimates billions of dollars of new revenue to the city and state, and some of FCR's assumptions have been forcefully challenged by not only critics but also by two city agencies, which estimate costs and revenues differently.

And our government isn't helping us find out more.

Yesterday, the issue came up briefly, and inconclusively, at the meeting of the Brooklyn Borough Board Atlantic Yards Committee. The topic: socioeconomic conditions, which, according to the state environmental impact process, covers a lot of ground, including direct or indirect displacement of residential and commercial tenants,and adverse effects on specific industries.

There's no requirement to figure out the fiscal impact of the project. The Environmental Impact Statement (EIS) from the state Empire State Development Corporation won't address it--a draft should be issued in a few months--and the Borough Board meetings are supposed to track issues in the EIS process.

Yesterday, Borough President Marty Markowitz, an enthusiastic supporter of the project, brought up the issue, querying George Sweeting, a deputy director of the city's Independent Budget Office (IBO), with a leading question. According to a September 2005 report from the IBO, Markowitz said, "this project would result in a small net fiscal gain to the city over 30 years. If you evaluated it on the basis of the commercial, and retail, and residential sections, would it result in... a bigger net gain?"

Sweeting responded cautiously but positively. "The paper focused solely on the arena. We had a pretty good sense of the subsidies and benefits that were available," he said, adding that calculating the impact on the entire city was complicated, since it would require determining whether new residents at Atlantic Yards were new to the city (and thus new taxpayers), and who would occupy apartments vacated by New Yorkers moving to the project.

However, given that most of the subsidies available on the non-arena portion are of-right, and available to any developer, Sweeting said, "it's a virtual certainty we would find a larger net fiscal benefit."

But how much larger--a few million, or a few billion? A benefit sufficient, for example, to absorb a potential huge increase in traffic and transit costs? (The arena would represent less than ten percent of the project square footage.) That tantalizing question was put aside.

Certain tax breaks indeed would be available to any developer, as Sweeting said, as would some affordable housing subsidies--though these would be cumulatively much larger than typical. However, other benefits that don't fall under the rubric of subsidies would not be of-right; those include the conveyance of city streets, city infrastructure costs, the opportunity to override city zoning, and the opportunity for the state to invoke eminent domain. Note that Develop Don't Destroy Brooklyn calculates a very large set of subsidies.

A look at the arena numbers

The IBO report estimates that, over 30 years, the arena would produce $28.5 million (present value, 2005 dollars) more in revenue than the project would cost the city, and that "the combined state and local 30-year net fiscal surplus would be $107.0 million (2005 dollars)."

The IBO's conclusions have been challenged. Sports facility analyst Neil deMause, on his Field of Schemes site, noted that the IBO underestimated the amount of subsidies due to the developer, and also made optimistic calculations--based on assumptions provided by the developer--about the number of fans coming from New Jersey. Change those numbers and the "small net fiscal gain" could turn into a loss.

Why would the arena benefit the state more than the city? The report states: Much of the difference between the results for the city and the state is attributable to the fact that all those who earn income at the arena—Nets players, executives, coaches and other staff, and other workers—must pay New York State personal income taxes, while only New York City residents pay New York City personal income taxes.

Public costs for the project

Even though the IBO didn't try to estimate revenues from the new taxpayers who would move into Atlantic Yards, it did try to estimate some public costs posed by the project as a whole, not just the arena. The IBO report estimates that the cost of delivering new education, sanitation, and police services over 30 years would be $530 million in current dollars (present value), or $208.6 million more than the $321.4 million estimated by Andrew Zimbalist, the sports economist FCR hired to estimate the fiscal impact of the project.

However, the cost almost certainly would be even higher. The IBO's higher cost prediction was based on an estimated 6,000 housing units, not the 5,850 number used by Zimbalist. However, the developer now plans at least 7,300 units onsite, plus up to 1,000 additional units offsite. More people require more city services.

And the IBO report doesn't address the cost of traffic. Transportation engineer Brian Ketcham, looking at the entire range of development for northwestern Brooklyn, including Atlantic Yards, estimated that traffic could generate $250 million a year in externalities, including the cost of air pollution, traffic noise, and lost productivity.

As noted above, Develop Don't Destroy Brooklyn calculates a very large set of subsidies.

$6 billion in revenue?

Forest City Ratner cites $6 billion in new revenue to the city and state to be created by the project over 30 years, but less frequently acknowledges the $1.1 billion in public costs. Note that the apples-and-oranges issue here. The IBO uses present value--the cumulative number in current dollars, rather than the cumulative number after 30 years. So the developer should use present value as well; under one scenario, that means $2.1 billion in revenues and $572.6 million in costs. Under present value, note that the ratio of costs to revenues is higher. (See Chapter 3 of my report for all these figures.)

But those revenues depend on some dubious assumptions, ones criticized by the New York City Economic Development Corporation (NYCEDC), which is a general supporter of the project.

For example, as noted in Chapter 3 of my report, NYCEDC disagrees with Zimbalist’s estimates of how many staffers associated with the basketball team would live in New York City and pay city income tax. Zimbalist, in his 2004 report and 2005 report, assumes that 30 percent of the Nets players will live in the five boroughs and pay city and state taxes, while 75 percent of the arena workers will live in the city. However, NYCEDC estimates that 20 percent of the players, 35 percent of the executives and team staff, and 50 percent of the facility staff would reside in New York City.

More crucially, NYCEDC and Zimbalist differ significantly on those assumptions mentioned by the IBO's Sweeting: how much revenue would be generated by the new residents in the project. Zimbalist, in his first report, in 2004, projects that the average annual income of households in the development would be between $80,000 and $90,000. In his second report, in 2005, he projects that the average annual income would be $94,875. (If he were to do another report, acknowledging the addition of another 1,300 market-rate condos, his estimate would undoubtedly rise.)

But Zimbalist and the city agency apparently disagree significantly in methodology. NYCEDC assumes that the new units "will represent an equivalent increase in households Citywide, either directly in the project itself or as infill in units vacated by households relocating to the project. Income tax revenue is based on an average income of $45,000, the Citywide average for all industries." (Emphasis added.)

Given that income tax revenue is key to Zimbalist's estimates, this represents a discrepancy deserving of further study. Also note considerable challenges to Zimbalist's assumptions in this report by urban planner Jung Kim and economic anthropologist Gustav Peebles.

The overburdened IBO

I caught up with Sweeting after the session yesterday and asked him again about the challenge of doing a full fiscal impact study. "You would have to make assumptions about the kind of firms that come in, assuming there's still a commercial component," he said. "That would tell you what the salaries are. You make assumptions about the income taxes that would result, and the corporate taxes."

He continued, "To estimate tax revenue [on the residential component], you'd need to know the average household income of the people coming in. Then you want to make at least some calculations about how many of them are new to the city and how many are from elsewhere in the city."

Were Zimbalist's assumptions appropriate? "I'm not going to criticize the assumptions he made," Sweeting said. "The way we set it up, once we got to a positive fiscal impact for the arena, that was the part that we felt comfortable tackling."

But that's a fraction of the entire project, I said, pointing out that the NYCEDC and Zimbalist differ. "That's why that assumption about how many are new is a key part of the analysis," Sweeting acknowledged. "And you also want to think about who takes the apartments, does that create space for other new people to come in, or maybe that solves some of the shortage of affordable housing."

"We just chose not to do that," he said. "But that's not a reflection on the quality of the work of other people who have tried to do it. It's just not something we had the time or the resources to get into."

Sweeting pointed out that, as stated during the meeting, the project as a whole would likely generate greater fiscal benefits than the arena would. Still, a solid estimate of the project's fiscal impact remains elusive. Can any other agency pin it down?

"Not that I'm aware of," Sweeting said. "We could, if we had nothing else to do."

Will we ever know?

At the 5/26/05 City Council hearing on the project, urban planner Mafruza Khan of the Pratt Center for Community Development testified:
Given the wide divergence in [subsidy] estimates, from $200 million to over $1 billion, we do want to emphasize that it is impossible for the public to know whether this project is a good deal without knowing how much it will cost to taxpayers. It is being asked to buy something without knowing how much it will cost.

Given the wide divergence in estimates of revenues, as well, it remains impossible to know whether the project is a good deal. However, the press has not pursued this question. In an 11/27/05 editorial, the New York Times declared:
The city's nonpartisan Independent Budget Office calculates the arena would produce a modest benefit for the city and state, $107 million over 30 years. Even that may be optimistic...
The Nets arena is not destined to be a cash cow, but the borough deserves a sports team, so long as the price is not too high.

But the Times didn't acknowledge that the IBO report mostly concerns the arena. We still don't know the price of the Atlantic Yards project.

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