No Land Grab

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N.Y. Jets Out, PILOTs In?
New Type of Debt May Outlive Stadium Deal

An unusual approach to debt involving payments in lieu of taxes might become the public finance legacy of New York City's thwarted attempt to build a stadium in Manhattan for the Jets football team.

The city's plan to construct the stadium on the far West Side suffered a serious and perhaps fatal blow last week when a state panel quashed the $2.2 billion project. The stadium proposal also served as the centerpiece of New York's bid to host the 2012 Olympics, and many believe last week's setback effectively killed the city's candidacy. The International Olympic Committee is scheduled to choose from among New York, Paris, London, Madrid, and Moscow on July 6.

Mayor Michael R. Bloomberg's proposal to pay for New York's portion of the stadium costs called for a type of debt that officials and market participants say has not been used before in the city. The plan involved the creation of a local development corporation to issue bonds backed by PILOTs - payments in lieu of taxes - which are offered as incentives for companies to stay in the city and generally are lower than property taxes. While PILOT-backed deals have occurred in other parts of the country, such transactions remain rare, market participants say.

Regardless of whether the stadium is ultimately built - the Jets and the city have both said they are weighing alternate funding - this new type of PILOT-backed debt will likely find other uses in New York City for city- and state-financed projects.

Critics charge that PILOT-backed debt is a potentially risky financing mechanism that gives the mayor too much control over the revenue as well as the ability to shape development without legislative oversight.

The proposed West Side stadium is only one of many development projects the Bloomberg administration has proposed for the city and its waterfront, and deputy mayor Daniel L. Doctoroff told The Bond Buyer last week that PILOT-backed bonds may be used to finance some of these other projects.

Dedicated PILOTs are the main source of backing for $3 billion of bonds to be issued by the Hudson Yards Infrastructure Corp., another local development corporation, to finance redevelopment of rail yards just east of the stadium site. The project involves the extension of a subway line and the creation of as much as 24 million square feet of office space and will continue even though the stadium's future remains uncertain, Doctoroff said.

"We're moving full steam ahead," Doctoroff said of the development on what's known as the eastern rail yards parcel controlled by the state's Metropolitan Transportation Authority.

In addition, PILOT-backed debt has been proposed to finance a new basketball arena in Brooklyn for the New Jersey Nets and a new baseball stadium for the Yankees in the Bronx. A PILOT-backed financing proposal for the Nets project has already been made public, and a banker familiar with the less-advanced Yankees plan said it would also involve PILOTs.

Moody's Investors Service analyst Robert Kurtter said that while he talked to city officials about this new type of PILOT-backed debt, Moody's hadn't received a formal presentation on it because neither the Hudson Yards agency nor the local development corporation for the West Side stadium bonds had been close to going to market.

"We didn't develop an approach to it," Kurtter said, adding that PILOT-backed debt will be rated on a transaction-by-transaction basis.

"It would be a brand-new security type," said Standard & Poor's analyst Robin Prunty. She said her rating agency also had not yet developed criteria for such financings.

Potential credit concerns involving PILOT-backed debt include whether the entities making the PILOT payments are creditworthy, Kurtter said. Depending on its structure, a particular PILOT-backed deal may be assigned a corporate credit instead of a public finance one, he added, since most of the entities paying the PILOTs are companies.

Under the stadium-financing plan, debt issued by the unnamed local development corporation to fund the city's $300 million contribution would have been backed by broad PILOT payments that the city collects, as opposed to dedicated revenue from the site.

Roughly $40 million in PILOT payments goes into the city's general fund annually, and this revenue stream is expected to grow to $70 million by 2009, according to city officials. The $30 million of incremental growth was to go towards debt service on the city's $300 million of bonds, said Raymond Orlando, spokesman for the city's budget office.

The Bloomberg administration has argued that state and city law empower the mayor to receive and dispense PILOTs. The city has termed PILOTs "non-surplus personal property" instead of "revenue," a legal distinction that allows the aggregate payments to be absent from the budget's accounting of revenue and expenses.

This interpretation has serious implications, attorney Eugene W. Harper Jr. said in an opinion piece last month in the New York Sun. Say "the mayor has a pet project," he wrote. "... He has no money in the capital budget. Borrowing has exceeded the city's debt limit. He needs over $100 million to finance the project. Annual debt service exceeds $5 million for 30 years. Simple: He identifies property producing the requisite level of debt service in taxes, instructs an agency to negotiate a PILOT arrangement (or allocates existing PILOTs), and then 'assigns' the PILOTs to bondholders willing to finance the project."

Under this system, mayors can set their own development agenda for the next 30 years while depriving the city of a revenue source, Harper argued.

Some critics have derided PILOTs as the mayor's "slush fund," saying he should not be allowed to divert this revenue stream from the city's general fund. The first person to use that term was City Council Speaker Gifford Miller, a Democrat who is expected to challenge Bloomberg when he runs for re-election this November.

Budget watchdogs also have bemoaned the lack of a central, public accounting of PILOT payments that the city bills and receives. They say that while the city's general fund takes in $40 million of PILOTs per year, the total that the city collects remains unclear.

"We have a big transparency concern," said Stephanie Greenwood, research analyst at Good Jobs New York, a nonprofit organization that promotes accountability in the use of government subsidies.

Doctoroff countered that PILOTs are a valuable resource.

"We've used PILOTs to finance projects for a long time," Doctoroff said, even if they weren't previously securitized. "People have benefited from that use."

The City Council passed legislation last month requiring that PILOTs go through the normal budget process. Another part of the legislation would require the mayor to provide the council a monthly report detailing the amount of PILOTs received, the source of the payments, the amount of the real property or other tax for which the entity paying the PILOTs would have been responsible, and other information.

The administration's proposed use of PILOTs is expected to wind up in court. Yet even if the City Council's legislation stands, the law would not preclude the use of such payments to back debt, according to council Finance Committee chairman David I. Weprin. A majority of city lawmakers support the stadium, he said, and if the city gets another shot at building it, they would likely support the use of PILOT-backed debt to fund part of it.

Weprin disputed the view that PILOTs, which are set by the city's Industrial Development Agency, constitute a risky revenue stream.

"Once the City of New York enters into a contract with a developer, these are long-term contracts, and to me, that's a very good backing for bonds," Weprin said.