Tuesday, December 21, 2004

West Side Plan Is Risky Effort, Forecasters Say

New York Times
December 21, 2004

West Side Plan Is Risky Effort, Forecasters Say

he Bloomberg administration's $4.1 billion financial plan for transforming the West Side of Manhattan has run into increasing criticism from independent financial analysts as an expensive and risky strategy that may be impossible to pursue under current statutes.

Critics are not opposed to the extension of the No. 7 subway line from Times Square to 34th Street and 11th Avenue, or the new streets, parks and other projects within the plan. But they say that the administration's method of paying for these projects, along with the city's $300 million share in a new football stadium for the Jets, will add an unnecessary $1.3 billion to the price tag and pose risks for the city budget.

To provide financing for the project, the administration plans to create the Hudson Yards Infrastructure Corporation, which would issue long-term bonds and short-term debt to pay for the parks, the streets, the subway and a deck over a railyard east of 11th Avenue, between 30th and 33rd Streets, where new development could take place. Using the corporation means the city's financial plan would not have to go through the normal budget process and avoids a potentially nettlesome vote by the City Council.

"The city's proposed Hudson Yards financing scheme is fraught with several serious problems and, in my opinion, should be scrapped," James A. Parrott, chief economist for the Fiscal Policy Institute, a labor-backed research group, told council members at a hearing last week. "Instead, a plan of infrastructure improvements for the far West Side should be incorporated into the city's capital budget."

Ronnie Lowenstein, director of the city's Independent Budget Office, told council members that the city's proposed plan would cost $1.3 billion more than if the city used conventional borrowing.

City officials do not deny the additional cost, but say that the projects, along with a rezoning of the West Side and the proposed 75,000-seat stadium, would catalyze residential and commercial development in the 59-block area, generating more than $60 billion in new tax revenues over the next 30 years. At the same hearing, Deputy Mayor Daniel L. Doctoroff said that in an era of limited resources, the "only alternative is to do nothing." He added, "It's an investment we can't afford not to make."

The hearing before the City Council's finance committee did not have the raucous, carnival-like atmosphere of another forum the same week concerning the proposed $1.4 billion stadium over the West Side rail yards, where the chants of protesters collided with the boisterous roar of construction workers demanding jobs.

The finance hearing was conducted under the dim lighting of the Council chamber. There were no raised voices and the room began to empty after only 30 minutes. But with the Council expected to vote next month on rezoning the neighborhood, critics painted a dark picture in contrast to the administration's sunny view.

Mr. Doctoroff said the advantage of the plan is that it would pay for itself. The corporation, he said - not the city - would be responsible for paying off the bondholders, using tax revenues from new development on the West Side.

"We developed a creative financing plan that pays for itself with new revenues it will generate - not with capital budget money," Mr. Doctoroff testified. "That means the Hudson Yards plan won't compete for resources with other important capital projects."

In the early years, said Mr. Doctoroff and Mark Page, the city's budget director, new residential and commercial development would not generate enough revenue to pay the interest on the bonds. So under the city's plan, the corporation would issue about $1 billion in short-term debt backed by the city's Transitional Finance Authority and income tax revenues.

But critics say the city would be on the hook for the short-term debt if West Side development did not occur quickly enough and investors failed to buy the corporation's short-term notes. They say the corporation would then be using income tax revenues that flow into the city budget.

"You're putting city income tax revenues in jeopardy," said Richard Ravitch, the former chairman of the Metropolitan Transportation Authority and once the state's top economic development official. "But the law is clear that T.F.A. can't be used for projects that don't go through the budgetary process."

Earlier in the hearing, Mr. Page insisted that the city was using the finance authority properly, although he acknowledged that the administration had not gotten a legal opinion to that effect.

Mr. Ravitch added that the city's financial plan was vulnerable to a legal challenge. And both sides expect opponents of the stadium to file at least two lawsuits in the coming weeks, one challenging the adequacy of the environmental view for the stadium and one challenging the city's financial plan.

In an October letter to Mayor Michael R. Bloomberg, William C. Thompson Jr., the city comptroller, also warned that his plan represented a substantial commitment of funds "without the oversight protections inherent in the city's capital budgeting process."

Mr. Doctoroff did not dispute the extra cost, but he played down the risk that the finance authority would have to step in, saying, "We don't expect it will ever get called on."

As for the long-term bonds issued by the development corporation, the deputy mayor said that bondholders, not the city, would be at risk if the tax revenues from new development failed to materialize and the corporation defaulted on its obligations.

But some experts have questioned the city's estimate that 26 million square feet of office space and nearly 14,000 apartments would be built on the West Side over the next 30 years. While the city's demand for housing appears insatiable, economists like Rae Rosen at the Federal Reserve Bank, and James Diffley, a managing director of Global Insight, one of the nation's largest economic forecasting companies, say that the Bloomberg administration is being overly optimistic when it comes to office buildings.

"What's implausible is that one new, unproven district would capture all that demand," said another economic forecaster, Hugh Kelly of Real Estate Economics.

Critics say that raises the possibility of a default by the development corporation. Although the corporation would be a legally separate entity from the city, State Comptroller Alan G. Hevesi warned in a July report that the bonds "may be perceived by the financial community as a moral obligation of the City of New York and could adversely affect the city's credit rating."

Mr. Hevesi noted that the extension of the No. 7 subway line accounted for half the debt. He said major transportation projects have a history of large cost overruns and delays.

"I know the bonds can't be sold just on the credit of the Hudson Yards Infrastructure Corporation," Mr. Ravitch said at the hearing. "Mr. Doctoroff may be sincere in saying that the city is not on the hook. But to suggest that a default wouldn't affect the credit of the city is silly."

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