Hudson Yards Financing Plan Resembles Financing Schemes that Preceded New York’s 70s Fiscal Crisis, Warns the New York City Bar Association

 

( New York, May 31, 2007,) In an analysis of the legal and policy implications of the novel financing method employed by New York City for its ambitious, 45-block Hudson Yards area re-development on the far West Side, the New York City Bar Association cites troubling parallels with now discredited moral obligation financing schemes that preceded New York's infamous Fiscal Crisis of the 1970s. 

The report examines the City's decision not to issue General Obligation bonds pursuant to capital budget procedures and to create a not-for-profit corporation to issue revenue bonds to finance infrastructure improvements such as the extension of the No. 7 subway line in the Hudson Yards area. The bonds are to be backed by payments in lieu of real estate taxes (PILOTs) paid primarily by developers of to-be-constructed commercial buildings. According to Peter Kiernan, the Chair of the New York City Affairs Committee which drafted the report, “by issuing these innovative corporate revenue bonds instead of general obligation city debt, the project avoided normal scrutiny and capital budget approval. This denied the public the opportunity to review the merits of the plan versus other spending priorities.”

The report explains that if all goes as planned at the Hudson Yards, the financing will be serviced by developers' PILOTs when buildings are built. However, according to Kiernan, “Development can be impeded by rapidly rising costs, environmental problems, construction delays and adverse market conditions, which could leave the city morally but not legally obligated to pay the debt service if PILOT payments were to be inadequate. In all events, until adequate PILOT revenues are produced, the City Council will be requested to appropriate debt service payments.”

SIMILARITIES TO 1970s FISCAL CRISIS

“The dependence on legislative appropriations and PILOT revenues bears an eerie resemblance to the development of Battery Park City in the early 1970s” says Kiernan. The revenue bonds for the Battery Park City development also were dependent on development, and until construction was underway the state legislature was "morally obligated" to service the debt. The buildings were not built on schedule, and the issuer was not able to pay the debt service.

The report notes that the Battery Park City default problem correlated with the abrupt closure of the capital markets to the City igniting the Fiscal Crisis and creating an environment where virtually every decision the City made was in the context of regaining access to the credit markets. According to Kiernan, “Financing became policy, rather than a means of implementing policy. During the Fiscal Crisis that was a regrettable but necessary distortion of the governmental process. It is not necessary now. Yet in many respects the same distortion is seen at Hudson Yards where policy determination is geared to financing imperatives.”

While applauding the Hudson Yards project, the report cautions that “in substantial part, the Fiscal Crisis resulted from the City’s reliance on borrowing outside of its means. For the Hudson Yards project, the City may have overstepped its limits by avoiding its normal capital budget processes and embracing unnecessary risks.”