Development officials fight back against Times portrayal of tax-exempt bonds for private projects; is there rationale to subsidize the poaching of sports teams?

In response to that tough March 5 New York Times lead story about tax-exempt bonds for private projects like the Barclays Center, Toby Rittner, President & CEO, Council of Development Finance Agencies (CDFA) has issued a statement titled New York Times Rebuttal: Private Activity Bonds Support Job Creation & Economic Development--Flawed, Inaccurate New York Times Article Debunked:

The New York Times article, A Stealth Tax Subsidy for Business Faces New Scrutiny, is riddled with inaccuracies and misinterpretations of one of the nation’s most important economic development tools: qualified private activity bonds (PABs). The story, sensational and misleading throughout, highlights perceived misuses and infers abuses of the U.S. tax code, all the while ignoring the essential public purpose that these bonds serve. PABs are exactly as they sound, a bond instrument, supported and endorsed by the United States Congress since 1914, that catalyze private investment in projects and industries that may otherwise not receive conventional financing. PABs are one of the oldest tax policies on record and were included in our Nation’s first formal tax code.

(Emphases added)

Consider by contrast the observation by sports economist Andrew Zimbalist in his 2003 book, May the Best Team Win: Baseball Economics and Public Policy, where he wrote:

While one may legitimately question the costs and benefits to a particular metropolitan area of attracting a professional sports team, there appears to be no rationale whatsoever for the federal government to subsidize the financial tug-of-war among the cities to host ball clubs. If there is a global welfare gain from the relocation of a team from city A to city B (because city B may be larger or wealthier or have more avid sports fans), then city B ought to able to pay for that gain without a subvention from Washington, D.C.

Of course Zimbalist did not raise that point in the 2004 and 2005 reports on Atlantic Yards that he produced at the behest of developer Forest City Ratner.

Conventional financing preferred?

Rittner writes:

Let’s address the article’s inaccuracies. First, the Times states that the 1986 tax code created a “stealth subsidy for private enterprise”. Stealth? The tax exempt bond section of the Internal Revenue Code is very well established, dating back 100 years, and it allows over 50,000 state and local bond issuers throughout the country access to this critical financing tool. The PAB market amounts to just a fraction of the total market for tax-exempt bonds. This tool is decisively not stealth, and in fact is one of the most well understood and well regulated parts of the tax code. They were, as the article indicates,
well vetted during the long and transparent tax reform process of 1986. The end result was an improved development finance tool – not a “stealth subsidy”. The inference that PABs are a secret or a loophole that allows large private business interests to benefit where others would not is either naïve or purposefully misleading. Most private businesses would prefer to use conventional lending tools, but given market and project economics, some require alternative lending options to access capital. The private activity bond market provides this critical access to capital.

Why would they prefer to use conventional lending tools if they can save enormous sums via tax-exempt bonds? Forest City Ratner will save perhaps $150 million from the federal tax subsidy for the arena bonds.

A few bad apples?

Rittner writes:

Second, the article identifies a handful of potentially alarming projects – a golf course, museum, basketball arena and office buildings for two financial institutions. There are two substantive flaws in the Times article. While these projects may seem less worthy of tax-exempt financing on their face, such a cursory review is irresponsible at best. To begin, the identified projects represent a mere fraction of the overall number of projects that benefit from PABs. PABs are issued on behalf of thousands of private enterprises like small manufacturers, non-profits, veterans, housing developers, universities, first time farmers, cultural institutions, hospitals and renewable energy providers annually. Further, each of these projects were supported and approved for PAB financing by state or local governments with their understanding that the projects were important to the economic development and long range stability of their communities.

Or, alternatively, they were supported because local economic development officials knew they could offer a carrot to a sports facility developer--as with the new stadiums for the Mets and Yankees--with little cost to local taxpayers.

No loss to the feds?

Rittner writes:

Third, the Times article implies that the federal government is forgoing tax revenue by offering lower interest rates and interest free income through PABs. This could not be further from the truth. Little is lost by the federal government because, in the vast majority of these deals, the projects would not have otherwise proceeded without the tax-exempt bond financing authorized by the federal government and issued by local governments. More plainly stated, how can the federal government lose revenue when they never had it in the first place? The notion that the projects would have happened anyway and that investors would have otherwise invested in taxable instruments is not supported by data or by any reputable development finance professional – it is an academic theory.

Wait a sec: had there been no federal tax-exempt bonds, would that have stopped the Atlantic Yards arena, able to take advantage of a new media market and luxury suites, and to offer a home for the woebegone Jersey-based Nets?

Wouldn't Bruce Ratner and his partners simply been forced to take on some additional partners, or to hold back on some of the bells and whistles?

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Now they tell us: Times says federal tax break that enabled the Barclays Center (and other businesses) comes "at the expense of American taxpayers"; Forbes cover guy Prokhorov is a beneficiary

From the lead story in today's New York Times, A Stealth Tax Subsidy for Business Faces New Scrutiny:

The last time the nation’s tax code was overhauled, in 1986, Congress tried to end a big corporate giveaway.
But this valuable perk — the ability to finance a variety of business projects cheaply with bonds that are exempt from federal taxes — has not only endured, it has grown, in what amounts to a stealth subsidy for private enterprise.
A winery in North Carolina, a golf resort in Puerto Rico and a Corvette museum in Kentucky, as well as the Barclays Center in Brooklyn and the offices of the Goldman Sachs Group and the Bank of America Tower in New York — all of these projects, and many more, have been built using the tax-exempt bonds that are more conventionally used by cities and states to pay for roads, bridges and schools.
In all, more than $65 billion of these bonds have been issued by state and local governments on behalf of corporations since 2003, according to an analysis of Bloomberg bond data by The New York Times.
At a time when Washington is rent by the politics of taxes and deficits, select companies are enjoying a tax break normally reserved for public works. This style of financing, called “qualified private activity bonds,” saves businesses money, because they can borrow at relatively low interest rates. But those savings come at the expense of American taxpayers, because the interest paid to bondholders is exempt from taxes.

About the arena

While the article actually says nothing about the Barclays Center beyond the first mention, the lead photo on the jump page (left) shows the arena. Maybe the Times is making up for its very odd omission of the arena and the Atlantic Yards project last December in its "United States of Subsidies" series.

For the Atlantic Yards arena, the New York City Independent Budget Office in 2009 estimated $194 million in federal tax breaks on tax-exempt bonds, based on $678 million sold. Given that $511 million in bonds were sold, the federal tax break was likely cut about 25%.

The city and state tax savings on the bonds is minor, though there are significant other direct subsidies and tax breaks.

Times commenter Michael A. Livingston wrote:

I worked on tax-exempt bonds in Congress in the 1980s and it is quite astounding what they are used for. When it is for schools roads and court houses I don't think most people object. But for Barclays Center?

This tax break was also used to build the new stadiums for the Yankees and the Mets. (Here's an interview with Neil deMause of Field of Schemes regarding this financing scheme.)

What next

Killing the subsidy "could bring in $50 billion for the federal government over 10 years," the Times reports, though the Obama administration instead would cap the value of the tax break, which has an unspecified benefit. (There's no indication it would be retroactive.)

Field of Schemes's Neil deMause is skeptical, pointing out that such talk in the past has gone nowhere.

Who benefits? Prokhorov

Not only does developer Forest City Ratner benefit from the tax break, so does Nets majority owner Mikhail Prokhorov, who also owns 45% of the Barclays Center operating company.

He's on the cover of the latest Forbes World Billionaires issue, with a respectful profile describing his political ambitions, Russian Billionaire Mikhail Prokhorov: From Oligarch To President?:

We cross the East River and head down Atlantic Avenue to Barclays Center. A car elevator dumps Prokhorov right in the center of the building, designed by Ellerbe Becket and SHoP Architects. On the way to his private box he is mobbed by strangers–as with his players, he’s hard to miss. Prokhorov waves, shakes hands, promises two kids in Nets jerseys he’ll give them an autograph later. “You’ve put your tie on! Do I need a tie now?” asks his partner in the Brooklyn venture, real estate developer Bruce Ratner, who pulls a cravat out of his own jacket pocket and playfully waves it in the air.
...The third member of an odd trio is hip-hop sensation Jay-Z, who performed at the opening of the center last September. (He has a reported cut of the action.) Or maybe not so odd: They’re all self-made, outsize successes. Prokhorov says there is “a natural bond” between him and Jay-Z. :

Self-made? Mike Taibbi wrote in 2010:

The auctions, at least by American standards, were shamelessly, transparently, hilariously rigged. The essence of the scam was the transfer of the state-controlled industrial jewels of the Soviet empire into the hands of a very small group of politically connected individuals. And the best example of them involved Norilsk Nickel... Prokhorov's bank, Oneximbank, helped run the auction, then got itself declared the winner after bidding $170 million to manage a 38 percent stake in a company then worth $1.2 billion. Irrelevant was the fact that another firm had bid twice as much.

Prokhorov's the 69th richest man in the world at $13 billion and the 10th richest in Russia, according to Forbes. Those numbers are down from an $18 billion peak in 2011, but surely leave a great cushion.

Forbes describes him admiringly:

Mikhail Prokhorov has been, by turns, banker, athlete, metals mogul, playboy, investor, media player, politician, NBA owner (the Brooklyn Nets) and now, again, politician. He rocked Russia when he jumped into its 2012 presidential race against strongman Vladimir Putin. No one expected him to win but he managed to get 8% of the vote, even though he ran an unexceptional campaign. (He did, however, rap on TV, perhaps suggesting that some of his friendship with Jay-Z is rubbing off). While the 6-foot-8-inch bachelor and martial arts enthusiast moved the Nets to a new arena in Brooklyn's Atlantic Yards, and often jets in to watch a game, he has no plans to settle in the U.S. He insists that his serious interest is Russian politics, and he has created a new party, the Civic Platform, that he intends to expand until it's strong enough to go head-to-head with Putin's United Russia. He has the money to see it through. In late February 2013 he sold his 37.8% share of Polyus Gold International Ltd. for $3.6 billion.

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