Subsidizing Inequality: New York City’s Crooked Development Agenda

Subsidizing Inequality: New York City’s Crooked Development Agenda

For far too long, New York City development projects have heavily subsidized corporations and big banks at the expense of small businesses and low-wage workers. Will Bill de Blasio do anything to change that?

Too much of Mayor Bill de Blasio’s campaign against inequality has been spent trying to change New York State law. His most ballyhooed initiatives, such as raising New York City’s income tax on the wealthy and hiking up the minimum wage for the city’s working poor, require a vote by a divided state legislature and a signature from a governor whose recent tepid support for progressive causes appears to hinge on political calculations.

De Blasio’s initiatives at the state capitol in Albany are laudable, but he could be doing a lot more to help the 46 percent of New Yorkers living at or near the poverty line. Indeed, he should be using the formidable powers that he does have to force city taxpayer–subsidized businesses either to provide decent-paying jobs or to get off the public dole. In doing so, he could end the corporate cronyism masquerading as economic development that has contributed to New York’s income inequality gap, which is greater than that of any other major U.S. city.

Under former mayor Michael Bloomberg, far too much of the approximately $4 billion that the city annually spends on economic development went to U.S. corporations and big banks. Through various subsidy programs, the taxpayer helped finance new stadiums for the Yankees, the Mets, and the Nets; large office buildings for Fortune 500 companies, such as a 2-million-square-foot tower for Goldman Sachs in lower Manhattan; and large retail complexes, such as the Gateway Center Mall in the Bronx. Many of the businesses that benefited from this taxpayer largesse had job-creation agreements with the city that they failed to fulfill. In cases where city-subsidized businesses did create jobs, government audits and reports by watchdog groups suggest that they were largely low-paying ones.

Mr. Bloomberg founded Bloomberg Associates, a non-profit consulting company to help other cities learn from programs and policies that he used as mayor to make New York attractive to big banks and corporations. For example, under the former mayor, the city regularly subsidized lavish corporate headquarters such as the Bank of America tower in midtown Manhattan. Considering that 39 percent of New York City bank tellers earn such low salaries that they require some form of public assistance, the city’s subsidy for the building—almost $50 million—is outrageous.

Indeed, while the Bloomberg administration was slashing city services in the name of fiscal austerity, it was simultaneously handing out taxpayer subsidies to businesses at much higher rates than the increase in overall city tax revenue. Most of the subsidies that the city gives away every year are in the form of tax expenditures, which include tax exemptions for industrial and commercial development as well as discretionary tax reductions for specific projects. According to the Fiscal Policy Institute, these business tax expenditures, which currently average $3 billion a year, have nearly tripled in value since 2001. Not only did these taxpayer giveaways grow more than twice as fast as the city’s total tax collections, they also increased 2.6 times as fast as the city’s budget overall.

Under former mayor Bloomberg, the city regularly subsidized lavish corporate headquarters such as the Bank of America tower in midtown Manhattan.

To address these issues, Mayor de Blasio needs to overhaul the New York City Economic Development Corporation (NYCEDC), a quasi-public entity that he indirectly controls because he appoints most of its board members. Yet the NYCEDC, the city’s chief development arm, is not a real public agency; it’s a nonprofit corporation that operates under a contract with the city worth almost $1 billion. Under this contract, the NYCEDC can manage and sell city properties and administer city programs that account for billions of dollars in tax subsidies and direct grants. In addition, the corporation administers the New York City Industrial Development Agency (NYCIDA), which is a type of public authority that has the power to issue tax-exempt bonds for public and private projects and to exempt commercial properties from paying property taxes. What makes this arrangement especially problematic is that the NYCEDC has its own bylaws, including one that implicitly limits representation by labor while requiring that the powerful business lobby—the Partnership for New York City—be consulted before the mayor makes his appointment for the chairperson of its board.

Under Bloomberg, the NYCEDC didn’t even bother obeying the law in its efforts to win approval from the City Council for the mayor’s favored megaprojects, such as those in Coney Island in Brooklyn and Willets Point in Queens. In 2012, after a three-year investigation by the office of the New York State Attorney General, the NYCEDC and two other development corporations with whom it was collaborating admitted to engaging in illegal lobbying. According to a legal agreement issued by the Attorney General’s office, these lobbying activities included ghostwriting op-eds, drafting letters to the City Council and preparing testimony for community members who were not NYCEDC officers or employees. In one instance, a NYCEDC official directed a local development agency to use its fax machine to transmit a letter concerning one of the real-estate projects to a city council member because: “We felt this letter coming from our fax machine would have been lobbying from the EDC.”

A $1 million study commissioned by the NYCEDC in 2010 provided further evidence of where the development corporation’s sympathies lie. The study, conducted by a management consulting company named Charles River Associates, was critical of proposals to establish a law that would set a threshold for the wages that city-subsidized businesses and contractors pay to workers. The team preparing the study included two economists, Daniel Hamermesh and David Neumark, who are not only outspoken critics of the living wage proposal but also have ties to the Employment Policies Institute, an organization that lobbies against minimum wage increases.

The NYCEDC not only has a well-documented history of subsidizing big businesses in exchange for poverty-wage jobs, it also has a poor record of enforcing many of the agreements that it negotiates. A 2012 city comptroller audit concluded that of the $497 million in tax breaks that 576 companies received in NYCIDA funding for that year, more than half—$318 million—went to companies that did not meet their job creation and retention obligations. In addition, the audit found that NYCIDA and NYCEDC failed to enforce claw-back agreements that would have enabled the city to recapture taxpayer benefits from companies that defaulted on their deals with the city, such as JPMorgan Chase, which was allowed to walk away with $14 million in subsidies. After the State Attorney General’s investigation and the city comptroller’s audit, the NYCEDC went through a restructuring.  However, for some, like former city comptroller John Liu, the city’s arrangements with the corporation are still highly problematic: “Why,” asked Liu when I interviewed him over the phone in January, “does the City of New York need to contract out with a nonprofit organization to carry out the city’s economic development policy?”

As a candidate, de Blasio presented a bold and detailed plan for revamping the city’s opaque economic development programs that included introducing mandatory uniform job-creation metrics for each tax expenditure and economic development incentive. He also pledged to expand the reach of the city’s Living Wage Law through executive order. Further, he called for the elimination of the city’s most expensive economic subsidy program, the Industrial and Commercial Abatement Program (ICAP), which provides tax breaks for the construction of industrial, commercial, and mixed-use structures. A 2013 report, Jobs for All New Yorkers, which de Blasio issued while serving as the City’s Public Advocate, cites a 2007 NYCEDC study of an earlier version of ICAP, which found that more than 75 percent of projects that received subsidies worth more than $2.8 billion would have gone ahead even without receiving taxpayer assistance. Despite reforms to the incentive program, the 2013 de Blasio report notes that the vast majority of the program’s benefits still go to office and large-scale commercial retail projects, and concludes: “It’s questionable whether most of these subsidies are necessary to induce any economic activity at all.”

However, as mayor, de Blasio hasn’t spoken out publicly against a program that his 2013 report highlighted as “a notorious example of poorly targeted incentives.” Moreover, de Blasio’s speeches and position papers haven’t been followed up by substantive changes in policy. There has been no action on the uniform job metrics and no executive order to close loopholes in the Living Wage Law. And further, NYCEDC officials and City Hall didn’t respond to written questions about whether there were any plans to eliminate or reform ICAP.

In April Mayor de Blasio appointed a new chair to NYCEDC’s board, former Citigroup executive Michael Schlein, who most recently worked as president and CEO of Accion, a non-profit devoted to building microfinance institutions. Schlein may well implement some of de Blasio’s promised reforms. But it’s an open question as to whether he will change the status quo at the NYCEDC and the NYCIDA. Bloomberg appointee and former Goldman Sachs vice president, Kyle Kimball, still serves both as president of the NYCEDC and as chair of the NYCIDA’s board. Further, nearly all the current senior staff of the NYCEDC were appointed during the Bloomberg administration. As such, they are in charge of overseeing most of the city-subsidized deals that came to life under the former mayor.

To be sure, the new mayor has made progress in breaking with the poverty-wage policies of his predecessor. De Blasio’s administration dropped a lawsuit that sought repeal of the city’s Living Wage Law, initiated by the Bloomberg administration after the city council overrode the former mayor’s veto of the bill. Furthermore, the de Blasio administration struck a deal with the developers of one of the largest subsidized projects in the city, the Hudson Yards, which eliminates a Bloomberg-era exemption from the Living Wage Law (originally inserted by former City Council Speaker Christine Quinn). As a result, the developers of Hudson Yards and their partners (who are receiving billions of dollars in city subsidies) will now be required to pay a minimum of $10.30 per hour with benefits and $11.90 per hour without benefits to about 1,650 workers, including building maintenance and security personnel. Still, such wages are unconscionably low for city-subsidized businesses to be paying workers.

Hudson Yards is just one of more than $12 billion worth of Bloomberg-era deals in the pipeline. Many of the others still need to be revisited in order to see whether better deals can be cut for working-class New Yorkers. And it is not too late to change the terms of many of the projects still in various stages of development and planning, according to former New York State Assembly member Richard Brodsky. “These are scandalous giveaways of taxpayer money to the richest corporations in the world,” Brodsky told me in an interview in January. Brodsky, who investigated the new city-subsidized Yankee stadium in the Bronx as former chair of the state assembly Committee on Corporations and Public Authorities, added: “Most of them [pending Bloomberg-era deals] are going to have to be approved or disapproved by Mayor de Blasio, and most of them should be disapproved.”

One of the most notorious Bloomberg-era deals is a warehouse terminal for online grocer, FreshDirect, in the Bronx. Slated for completion in 2016, this project stands to receive more than $100 million in taxpayer subsidies. “We have to take subsidies away from big companies like FreshDirect,” de Blasio stated during his campaign, “Give them to small businesses in the forms of loans.” However as mayor, de Blasio has been conspicuously silent on the FreshDirect depot project despite widespread opposition to it from neighboring residents and unions.

Another pending Bloomberg-era agreement that the de Blasio administration has been relatively mum about is a complex draft bailout agreement for a city-subsidized parking garage operation at Yankee Stadium, which is teetering on bankruptcy. Under a 2007 deal, the Bronx Parking Development Company, which leases the garages from the city, received subsidies to build the garages. The subsidies included $237.6 million in tax-exempt bonds, $39 million in direct city grants, and twenty acres of city-owned land. Last year, the parking garage company missed its scheduled bond payments, leading to the biggest municipal bond default in the first quarter of 2013, according to the financial publication Barron’s. The parking garage company also failed to fulfill its commitment to create fifty-five jobs and actually ended up losing six jobs, according to a 2012 city comptroller audit. To make matters worse, this taxpayer-financed but privately run operation has not paid the city any of the $3.2 million in annual rent or payments in lieu of taxes it has owed since it opened in January 2008.

The draft bailout plan for the parking garage company and its bondholders negotiated in the final days of the Bloomberg administration involves the city forfeiting rent on its property for at least the next forty years, according to the New York City Independent Budget Office and other sources. As part of this complex deal, taxpayers would subsidize a new $350 million, 28,000-seat soccer stadium at the site of one of the defunct garages. The subsidies for the new soccer stadium would involve tax breaks, more seizures of public land, and more tax-exempt financing issued by the NYCIDA. This heavily subsidized soccer stadium would be built for the New York Football Club, a joint venture between the world’s richest sports franchise, the Yankees, and United Emirates Sheik Mansour bin Zayed al-Nahyan, one of the richest men in the world.

It is not too late to change the terms of many of the Bloomberg-era projects still in development.

The mayor’s office and the NYCEDC did not respond to requests for information about the soccer stadium deal. However, this past April, Capital New York reported that the de Blasio administration had revived negotiations on the Bloomberg administration’s proposal for a soccer stadium near Yankee Stadium. “The de Blasio administration has begun a dialogue with key stakeholders on how to best proceed on the construction of a soccer stadium that also invests in community benefits, preserves public space, and provides good-paying jobs,” said Marti Adams, a de Blasio spokesperson.

However, with these types of deals, the devil is in the details. And in this case, the record of the Yankees (at whose behest the Yankee Stadium parking garages were built) is noteworthy. In addition to getting 600 free parking spaces for their own use, the Yankees were already receiving taxpayer subsidies worth more than $700 million for their new baseball stadium. According to a 2008 investigation by the New York State Assembly Committee on Corporations, Commissions, and Authorities, in addition to skirting federal tax laws to put together the Yankee Stadium deal, “NYCIDA manipulated and evaded State law requirements that there be a public economic benefit in exchange for the massive public subsidies received by the Yankees.”

What was the ostensible benefit for taxpayers? In a 2006 New York City press release, former Mayor Michael Bloomberg stated that the stadium project would “create nearly 6,500 construction jobs and result in about 1,000 permanent jobs.” However, according to the investigation by the New York State Assembly, the Bloomberg administration and the NYCEDC inaccurately stated how many jobs were expected to be created and also repeatedly made inaccurate claims that the Yankees, not the city, were going to be paying for the cost of building the stadium. Internal NYCIDA documents contradict the job creation figures touted by the former mayor and NYCEDC officials. In a 2006 application the Yankees filed with NYCIDA, they stated that the stadium project was expected to create only fifteen permanent jobs and seventy-one part-time jobs. To add insult to injury, NYCEDC officials reportedly failed to insist on bigger job numbers while at the same time threatening to pull the city’s tax-exempt financing if the stadium did not include a free luxury suite for city officials.

Unfortunately, the audits and investigations of the NYCEDC and the NYCIDA generally occur after it is too late to stop boondoggle projects such as the parking garages built for Yankee Stadium. To change this, Mayor de Blasio needs to follow through on his campaign promise to create a New York City Unified Economic Development Policy. Such a public document, along with other reforms, should include detailed information about what types of subsidies are going to private companies, and what types of benefits taxpayers are receiving in return. In addition, when he next visits the state capitol, Mayor de Blasio should lobby for the recently introduced Just and Open Business Subsidies Act (JOBS Act), which would set annual benchmarking standards for businesses receiving subsidies and establish annual reviews of their job creation obligations.

The targeted reforms being discussed are long overdue, but if Mayor de Blasio really wants to make his mark as a reformer, he needs to completely change the system. Do we really want a quasi-public “corporation” like the NYCEDC serving as New York City’s main engine of economic development? For far too long, economic development has been driven by a race-to-the-bottom logic that heavily subsidizes big banks and corporations at the expense of small businesses and low-wage workers. It’s time for cities to develop new economic development models that are more transparent and inclusive. We need to help those who really need it. And as mayor of New York City, Bill de Blasio should be leading the way.

Alex Ulam is a freelance journalist who covers finance and urban planning. His work has appeared in the New York Times, the Nation, Maclean’s, Landscape Architecture Magazine, the Architect’s Newspaper, and other publications.