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Comments by Bettina Damiani

Project Director, Good Jobs New York

Public hearing of the New York City Council Committee on Finance

on the expenditure of and reporting on payments in lieu of taxes

March 22, 2005

My name is Bettina Damiani, Project Director of Good Jobs New York, a joint project of the Fiscal Policy Institute with offices in Albany and New York City and Good Jobs First, based in Washington, DC. Good Jobs New York promotes accountability to taxpayers in the use of economic development subsidies.  Our website, (www.goodjobsny.org) contains the only publicly available database of the city's large corporate "retention" deals, and last year we released a report Know When to fold `Em: Time to Walk Away from NYC’s “Corporate Retention” Game,[1] detailing the failure of commercial subsidy agreements negotiated by IDA in the 1990s to produce job growth.

Thank you for the invitation to speak to you today about the collection and use of Payments In Lieu Of Taxes, or PILOTs.  The controversy around the proposed stadium on the Far West Side has sparked interest in the possible use of PILOT funds for that project. But the issue of who controls PILOTs goes beyond the debate about the merits of the Far West Side development proposal and addresses basic questions of good governance. As a subsidy watchdog organization, Good Jobs New York closely tracks the New York City Industrial Development Agency, one of the entities authorized under state law to negotiate PILOT agreements. Our comments today will be restricted to IDA PILOTs only.  In our view:

• Current law mandates that IDA-negotiated PILOT funds must be subject to appropriations by the City Council;

• Turning all IDA-negotiated PILOTs over to the city’s general revenue fund would not impact bondholders of IDA-issued tax-exempt bonds;

• The reporting requirements in the proposed bill would bring a welcome measure of transparency to a section of the city’s economic development policy that is still poorly understood by the public and policy makers; and

• Even if all PILOT funds were subject to council appropriations, using them or regular tax revenue to pay for private development projects – a process generally known as Tax Increment Financing, or TIF – is risky and must be done carefully in order to ensure adequate public benefits.

PILOTs Should Go To the General Revenue Fund

We share the Council’s position that under current law, PILOT payments must be considered public funds, and that as such they are subject to appropriation by the Council.

All PILOT funds received by the IDA must be turned over to the city “within thirty days of receipt” according to Section 874(3) of the General Municipal Law.[2] It is our understanding that the IDA actually never directly controls PILOT funds. Instead, after negotiating the agreement, the IDA oversees payment, but the companies are billed by the New York City Department of Finance and the funds are deposited directly into a PILOT Trustee account under the Department of Finance’s control. In either case, PILOT funds clearly fall within the framework of the City Charter, Section 227(a) that requires all city funds to go through appropriations:

No money, except for grants or gifts from private entities, shall be paid from any fund under the management of the city, or any fund under the management of any agency or officer of the city, or any other entity the majority of the members of whose board are city officials or are appointed directly or indirectly by city officials, except in pursuance of an appropriation by the council or other specific legal authorization.[3]

GJNY has searched for, but has been unable to locate, any “other specific legal authorization” that would permit the Mayor to draw down from the PILOT Trustee fund at his discretion for special projects prior to the end of the Fiscal Year, at which point whatever funds remaining are turned over to the general revenue fund. We understand that present and past mayoral administrations have done just that. However, none of the documents cited by the administration thus far seem to rise to the level of “specific legal authorization.”  In an effort to better understand how PILOT funds may have been used by mayors in the past, we submitted a Freedom of Information Law request to the Department of Finance for a list of all projects funded by discretionary use of PILOTs on February 18, 2005. We are still waiting for responsive documents.[4]

PILOTs Are Not Used To Pay IDA Bonds

To the best of our knowledge, putting all PILOT funds into the general revenue fund in order to comply with the law would not compromise bondholders of tax-exempt IDA bonds in any way. In the course of our core work of monitoring commercial retention subsidies, we have reviewed many contracts between the IDA and companies receiving tax benefits, including PILOTs. We have never come across a project in which PILOT payments were dedicated to backing or paying off bonds, as is proposed for the Jets stadium. PILOTs are used to convey a property tax break while bonds are used to convey a discount on financing. In the past, bonds have also been used as a means for providing sales tax exemptions. There are cases in which a company has a PILOT agreement but no bonds, or a bond agreement but no PILOT. All the bonds issued by the IDA must be paid back by the company that borrows the money, based on revenue streams generated by the company. In fact, there is language in the IDA’s enabling legislation that specifically exempts the city and state from any liability for IDA bonds:

State and municipality not liable on bonds or notes. The bonds or notes and other obligations of the authority shall not be a debt of the state or of the municipality, and neither the state nor the municipality shall be liable thereon, nor shall they be payable out of any funds other than those of the agency. (GML Article 18A Title I S 870.)

If PILOTs must be remanded to the “affected tax jurisdiction” within 30 days of receipt, and if neither the city nor state can be held responsible for IDA bonds, then it seems clear that PILOTs cannot be the sole, dedicated source of revenue for paying off IDA debt. Since they are not part of any obligation to bondholders, there is no obstacle to the full amount of PILOTs collected from being turned over to the general revenue fund.

Not Just Legal: Good Policy Too

We believe that in addition to being required by law, it is good policy for PILOTs and all public funds go through appropriations. Keeping tax expenditures within the budget process allows various priorities to be weighed against one another and deliberated in a transparent, democratic manner. Such a process also allows citizens to hold their councilmembers accountable for decisions about how revenues are used.

To this end, we are especially pleased that the bill includes strong reporting requirements that will allow the public and elected officials to track the use of PILOT payments going forward. We would urge the council to make the reports even more transparent by requiring that they be made publicly available, without the need for a Freedom of Information Law request, at the same time that they are made available to the council.

Complete transparency is the best guarantee that PILOT funds are collected and turned over to the city’s coffers in full. Regular, publicly accessible reporting will also allow interested citizens to have better information and get more involved in budget decisions. Anytime that happens, it’s a step forward for democratic government.

Call a TIF a TIF

Finally, a word of caution. Even if all PILOTs are turned over to the general revenue fund and subject to appropriations, the Council may one day decide to allocate funds collected through PILOT agreements towards paying off development debt. If it does so, it should proceed very carefully. The practice of diverting public funds to help pay for private development projects, generally known as Tax Increment Financing, or TIF, and was part of the original financing proposal for the Far West Side project. In theory, TIFs can be useful in spurring investment in distressed areas, but only in the rare circumstance where the market would not support development initially, but where the city can have confidence in the ability of the project to pay back its debt. Otherwise, the public is subsidizing development that would have occurred anyway or else is left holding the bag when a failed development can’t pay its bondholders.

In either case, revenue is siphoned off from vital public services such as education. According to a 2003 study by Good Jobs First, our parent organization, TIFs are responsible for drawing millions of dollars away from school districts all over the country, without school boards having any say in the matter.[5] This kind of trade-off of public good against private gain is one of the worst dangers of using PILOTs to fund development outside the appropriations process. Including PILOTs in the budget puts them where they belong: in a debate about how best to use scarce public dollars to meet the needs of all New Yorkers.

Thank you for considering our testimony.