Bloomberg on Stadium Bonds: It Depends What You Mean By 'Taxes'
In the last week, Queens councilmembers have thrown a wrench into the city's well-oiled plans for a new Mets stadium, insisting they won't sign off on the deal unless their borough is awarded the same "community benefits" boodle as George Steinbrenner has promised the Bronx. But whether or not the tempest in an apple hat is resolved in time for Wednesday's council vote on the Mets and Yanks financing package, the massive $1.56 billion stadium bond issue could face a bigger problem: It might well be illegal.
At issue is the use of city-issued tax-exempt bonds, which are cheaper than traditional bonds: The city Independent Budget Office has estimated that the two teams would save a combined $216 million thanks to this device, mostly at the expense of the federal treasury. The U.S. Congress, worried that it would end up subsidizing every local development deal that came down the pike, specifically outlawed using tax-exempt bonds on privately funded projects, including sports stadiums, in the 1986 Tax Reform Act. But the Bloomberg administration has argued that by having the teams repay the bonds with "payments in lieu of property taxes"--PILOTs--it's met the IRS requirement that the bonds be repaid by general tax revenue. As for the small matter that neither team currently pays any property taxes, making it unclear just what the PILOTs would be "in lieu of," City Hall sees that as no obstacle: If you call them PILOTs, they're PILOTs, say the mayor's people, and that's as good as a tax for bond purposes.
A little over a year ago, though, the mayor's office argued exactly the opposite. In declaring that the mayor had the right to spend PILOT payments however he wished--this was for the infamous "slush fund" of the now-dead Jets stadium deal--City Hall lawyer Michael Cardozo told the city council that "contractual rights to receive PILOTs in the future . . . are not 'revenues of the city.' They are instead contract rights that can be transferred or otherwise disposed of by the Mayor." Echoed city budget director Mark Page: "The concept that this money is the equivalent of tax money in terms of the treatment of the revenue and the role of the Council is something that I am advised is not true."
Whether PILOTs are or are not tax money is more than a semantic distinction: The IRS has yet to sign off on a "private letter ruling" approving the city's stadium bond plan, and if it rules that PILOTs aren't the equivalent of "generally applicable taxes," the bond issue goes poof. Economic Development Corporation vice president Seth Pinsky testified before the council finance committee earlier this month that without the tax-exempt bonds, both baseball stadiums "would be substantially more expensive and potentially infeasible."
At that same committee hearing, IBO director Ronnie Lowenstein warned that using PILOTs in this way represented "a very, very aggressive interpretation of the IRS code," and at least one national bond expert, who spoke on condition of anonymity, agrees. Bloomberg's argument that PILOTs are taxes "seems to be a transparent end run around the 1986 provision saying stadiums cannot be financed with private-activity bonds, which these clearly are," he says. "We have simply interposed an empty box into which the Yankees' stadium-related revenue would be placed, labeled that box 'PILOT,' and transformed black into white. If only solving the problems of real life were that simple."
Of course, whether the IRS can be convinced that black is white is an open question, especially since Bloomberg and George Steinbrenner have the best bond attorneys that money can buy--not to mention a potential hole card in a certain highly placed former Texas Rangers owner. (The IRS won't comment on pending applications.) Still, the question of the bonds' legality has left the stadium deals strangely unsettled, even as their financing hurtles toward approval. "For the finance committee to move ahead of the IRS seems cavalier," says Good Jobs New York research analyst Dan Steinberg, who first unearthed Cardozo and Page's testimony last week. "Especially when the city is so carefully attempting to dance around federal law."