Councilman James Sanders couldn’t help himself. No sooner had the chair of the City Council’s Economic Development Committee warned fellow legislators at the December 17 hearing on the city’s Olympics plan to hold off on questions about financing, than he was asking Deputy Mayor Dan Doctoroff: “And the city won’t have to put any money in the plan?”
Doctoroff’s answer, as always: “No existing tax money will be used.”
That word—”existing”—was not chosen lightly. For Doctoroff’s West Side dreams absolutely would require public money: at least $3 billion of it, for everything from an Olympic stadium to expanding the Javits Convention Center to—the big-ticket item—extending the No. 7 train to Eleventh Avenue. But in Doctoroff’s vision, all this would be “new” tax money: funds that would be created by the very development they were helping to build.
If it all sounds too good to be true, it probably is. Doctoroff’s plan to use this “tax increment financing” (TIF) to convert the West Side’s lofts and parking lots into a westward extension of midtown’s office towers is raising eyebrows among development experts—and could yet deep-six New York’s shot at winning the 2012 Olympic bid two summers from now, as IOC chair Jacques Rogge puts a microscope to cities’ financial plans in the wake of Athens’s disastrous preparations for the 2004 Games. “That would be the grandmother of all TIF districts,” says California TIF expert Howard Greenwich, whistling in amazement at a project that would be 10 times the size of the largest TIF on record. And it’s almost certain, he says, to cost taxpayers money—possibly for decades to come.
If you’ve never heard of TIFs before, you’re not alone: Though the New York state legislature passed a TIF law in 1984, it’s never been used. Elsewhere in the U.S., though, TIFs are the fastest-growing development subsidy, precisely for the reason Doctoroff likes to tout them: They supposedly require neither new taxes nor the use of existing ones. Since Proposition 13 curtailed property-tax hikes in California, for example, TIF has become “an industry unto itself,” says Greenwich, now soaking up 8 percent of all property taxes in the state.
The promise of TIFs is no less than magical: to generate millions of dollars in subsidies for private developers, without costing the local government a dime. To perform this feat of financial alchemy, start by marking off a “TIF district” (New York’s would cover most of the West Side between 28th and 42nd streets) and calculate the total property taxes it currently generates. All future tax revenue above that baseline becomes the “tax increment,” and can be used to help subsidize development on the site.
Sounds great—so long as new property tax receipts are enough to pay off the costs. “Doctoroff and NYC2012 say they modeled what the effects of this will be, but that’s just empty talk,” insists NYU economics and planning professor Emanuel Tobier. “They paid Bear Stearns a fortune to put some primitive assumptions into the computer, and let it spin out a scenario. If you’re going to rely on these distant forecasts, you’re looking for trouble. That’s how we got the stock market bubble.” Indeed, cost overruns and revenue shortfalls are common to sports facility construction projects—earlier this month Philadelphia announced that its two new stadiums will run a deficit of at least $5 million a year, thanks to faulty forecasting by Arthur Andersen of Enron fame. And TIF forecasts have fared no better. A California study of 38 TIF districts found that only four had generated enough property value growth to justify their tax subsidies; in Chicago, a similar survey determined that the city’s 121 separate TIF districts had cost $1.3 billion in taxpayer subsidies to developers, while generating just $362 million in new revenues. Then there’s the doomsday scenario: St. Petersburg, Florida, according to a September report by the New York City Independent Budget Office, saw property tax revenues actually fall in one TIF district, leaving the city to bail out the project with existing taxes.
A well-run TIF, says Dallas assistant city manager Ryan Evans, who has overseen dozens of such projects (including one for Ross Perot Jr.’s new basketball arena), should start with “a property that has very little on it. Then you have a series of developers move into that neighborhood, build all the public infrastructure for the city, and get paid back their investment from their own taxes.” That way, he explains, if nothing ends up getting built, the city is no worse off than when it started: There’s no new revenue, but also no debt to pay off.
Doctoroff’s plan, by contrast, would have the city fronting all the money by selling, likely through a “West Side Development Authority,” $3 billion in municipal bonds—so if development falls short, the public is left holding the bag. “It sounds like a rough row to hoe,” says Evans. “Because someone has to take the risk, and then hope there’s enough taxes generated to pay it back.”
And “hope,” to put it bluntly, doesn’t sell bonds. TIF bonds traditionally use a city’s general fund as a backup revenue source—but Doctoroff, no doubt with one eye to critics who charge the West Side plan will break the city budget, has promised that bondholders will have no recourse to municipal coffers. “Good luck!” replies Evans, who notes that in Dallas, bond buyers demanded proof of new construction and costly bond insurance, even after construction was already underway. For a completely speculative plan such as New York’s, Evans is adamant: “Someone’s going to have to guarantee those bonds.”
Greenwich insists that despite Doctoroff’s claims, that guarantor will ultimately be the city: “If that TIF district goes to default, the city will have a hard time ever selling bonds again, so they’ll do whatever they can to prevent that from happening. I don’t believe that the firewall’s going to be totally solid.”
Even without a direct bailout, TIFs have proven capable of eating into city budgets. In Washington, D.C., when $73.6 million in TIF financing for the Gallery Place mall ran into a brick wall after bond buyers balked at the revenue projections, the district was forced to expand the TIF to cover nearly half of its downtown core. And Columbus, Ohio, notes the Independent Budget Office study, has seen its downtown district empty out as business flees to the TIF district around its new hockey arena. Adding 20 million square feet of office space to the West Side during an economic slump could end up cannibalizing development—and tax revenues—from other parts of Manhattan, a prospect that is quietly striking fear into the hearts of those in charge of redeveloping the World Trade Center site.
Finally, if the office space market is slow to rebound, developers could simply demand further tax incentives to build there. That’s exactly what’s already happened in San Diego, says Donald Cohen of San Diego’s Center on Policy Initiatives: “It creates all sorts of pressure to continue to pour more money into that one area to make that work. It becomes a sinkhole.”
The IBO is readying a more in-depth study of TIFs for release in upcoming weeks. Meanwhile, Doctoroff will bring his Olympics slide show back to the City Council for the second of three hearings on January 30, where finances will at last be on the official agenda. But if Tobier is right, these hearings are just the preliminaries: The medal rounds won’t come until the TIF plan falls apart, and NYC2012 has to appeal to the state legislature for funds.
“Investors have their hands full of deals from municipal agencies that have gone belly-up,” he says of the financing plan. “They’re not schmucks. I know Doctoroff has got his heart set on this thing, but I just don’t see it happening.”