The gift that keeps on costing: Part 3, Christie’s cross

August 3, 2012 | Atlantic Yards, Capital markets, Local issues, Municipal finance, New Jersey, New York, Ornaments, Real estate taxes

By:David A. Smith

 

[Concluded from yesterday’s Part 2 and the preceding Part 1.]

 

So far, our tales of paradise hocked started with the visions of sugar plums that led, as reported in an older New York Times (September 8, 2010) article, to the building of Giants Stadium (RIP), the creation of a bond issuing authority (not RIP), and a very substantial unpaid bond obligation (definitely not RIP).

 

As Stadiums Vanish, Their Debt Lives On

 

My structure vanish, but my joke lives on

 

Over-levered civic authorities arise because anxious local leaders are keen to elevate their city using what faithful reader Matthew Healy has brilliantly dubbed ‘Cargo Cult Economic Development’ (by analogy with Richard Feynmann’s famous speech about Cargo Cult Science),want to be believe that summoning a big expensive spectacle venue will turn around years or decades of decline.

 

Stadia paying for themselves is an article of faith

 

Facing opposition from a curious mixture of fiscal skeptics and community activists, proponents often bedeck the tent-pole arena with ornaments like promises of affordable housing, as in Brooklyn’s white elephant Atlantic Yards – but once the proposal is approved, the ornaments typically disappear, and the city is left with solely a spectacle venue.  In real estate terms, spectacle venues have a horrid concentration of boom-and-bust:

 

Rather than having day-in, day-out demand, they are used for big inessential events – sports matches, rock concerts, political conventions trade shows – that occur infrequently, only on special occasions.

 

It works great when we can book the Beatles: Shea Stadium, 1965

 

The events the spectacle venues seek to attract can be anywhere, both in macro (which airport do we fly to?) and in micro (Boston, Worcester, or Providence?).  Once you decide your venue needs to fill 60,000 seats, you will be drawing from a big radius, and within that radius, multiple locations can work.

 

To Boston’s eternal disgust, Worcester is more convenient

 

Because it is effective only when filled by huge scrums, the spectacle venue demands a snarl of transportation wires – acres of parking lots, tangled highway overpasses, and helical vomitoria.

 

The host venue eradicates all real estate life around it: Dodger Stadium

 

Believing that if you build the spectacle venue, they will come, local officials have the real estate dynamics exactly backwards.

 

Am I being asked a non-economic proposition?

 

They think that filling it is easy and building it is hard, when just the reverse is true: building a spectacle venue is easy – just create an issuing authority – filling it afterwards, year after year, is hard.

 

A gaping maw to be filled each time: Giants Stadium

 

Fill me! Fill me!

 

This grim discovery dawns on leaders only a few years after they have invested hundreds of millions in its pursuit.

 

Once again, things that could’ve been brought to my attention yesterday!

– The Wedding Singer

 

 

By then it’s too late: the debt load is crushing.

 

Befitting its name, Giants Stadium is the granddaddy of phantom facilities. Taxpayers in New Jersey, already under pressure from declining local government revenues, this year [2010 – Ed.] will pay $35.8 million in principal and interest on the $266 million in remaining bonds for the Meadowlands Sports Complex, which opened in 1976 and includes the Izod Center and a horse racing track. Those bonds will not be paid until 2025.

 

As we just saw in Scranton, PA, however, more often the spectacle venue and its attendant built infrastructure represents a deadweight cost that drags down the city’s finances. 

 

The finances of public authorities are often murky.

 

We’ll put you right here, okay Jimmy?

 

To determine that the RCA Dome in Indianapolis, which was demolished in 2008, has $61 million in debt remaining and will not be paid off until 2021, one must sift through 700 pages of bond documents.

 

If only the debts imploded with it

 

Fortunately for us, in the internet age we have the great information leveling, which allows inspired local investigators like Gary Lewis to digest publicly available information and make it comprehensible.

 

Will you hear my testimony?  Gary Lewis advocating Chapter 9 for Scranton

 

Shining a light, however, is not always what public authority administrators want.

 

Desperate to plug holes, the [Giants Stadium] authority has spent the entire $160 million in rent payments it received from the developers.  Some of the money was meant to pay off debt associated with the arena and the stadium, and was supposed to last 15 years.

 

The money running out leaves frightened administrators with a politically impossible choice – either (1) accept decreased revenues and put the authority into default, or (2) adopt ever-more-hopeful assumptions in pursuit of ever-more-improbable strategies.

 

One guess as to which they pursue.

 

One of us has to guess right … doesn’t he?

 

To offset its declining revenue, the New Jersey Sports and Exposition Authority, which runs the sports complex but not the New Meadowlands Stadium, expanded instead of contracting: building aquariums, convention centers and other facilities, issuing hundreds of millions of dollars in additional bonds.

 

We’ll just shovel in more revenue sources

 

This blunder is foreseeable but almost inescapable psychologically (we will take bigger risks to recover when we are losing than when we are ahead) and politically (where even if we fail, the failure falls on another administrator, rather than ourselves.

 

By expanding the authority’s portfolio, though, [state officials] further strained its finances. So in 1992, the state began taking the authority’s debts onto its balance sheet.  Because the state has retired and refinanced most of the authority’s bonds, it is difficult to say precisely how much debt is tied just to Giants Stadium.

 

Unfortunately, successful or even semi-successful authorities can become de facto slush funds whereby anything and everything can be financed, all in one big commingled stew.

 

Don’t ask what that gray thing is, all right?

 

It’s the gift that keeps on taking. The old Giants Stadium, demolished to make way for New Meadowlands Stadium, still carries about $110 million in debt, or nearly $13 for every New Jersey resident, even though it is now a parking lot.

 

Now we’ll never know whether Jimmy Hoffa really does attend every Giants home game.

 

You wouldn’t think the one on the left so much better than the one on the right, would you?

 

When an enterprise is in trouble, there is however a major difference in risk assessment between privately run operations, where the directors and officers can be personally liable for malfeasance or negligence, and public authorities, where nobody ever gets prosecuted for idiocy or recklessness.

 

The authority has promoted Xanadu, a privately built retail complex that has yet to open next to the Izod Center.

 

Yeah, yeah – this will pack ’em in

 

That concept is inherently questionable – a new retail complex (as if we didn’t already have a superfluity of malls) in a location disconnected from both employment and residential areas?  Yet it is proffered with the most gauzy of logics:

 

During hearings in Trenton this year, Dennis Robinson, the president of the authority [Since stepped down – Ed.], said the sports complex generated tens of millions of dollars a year for the state from its facilities and in associated economic benefits.

 

I leave this stadium more vacant as I found it

 

Oh?  Got evidence?  Actually, this sounds like panic, setting up the public officials to be stampeded into betting long on a sports franchise, whose commitment to them is much shorter.

 

Rather than confront teams, they have often buckled when owners — usually threatening to move — have demanded that the public pay for new suites, parking or arenas and stadiums.

 

As resolute as spaghetti

 

For the spots team owners, it’s almost shooting fish in a barrel – threaten to move the team, on one pretext or another, knowing full well that the public officials (a) don’t know land-use economics, (b) cannot move their stadium and have no likely replacement tenant, and (c) face the voters every few years and hate having any failure visible on their record.

 

Just keep swimming, just keep swimming?

 

Caving to capricious owners becomes more risible when the evidence abounds that they have no loyalty at all:

 

Some politicians in New Jersey applaud the Jets and the Giants for building their own stadium. But the old Giants Stadium generated about $20 million a year for the authority. Now, the agency will receive only $6.3 million in lease payments from the teams, and needs additional state subsidies.

 

Though never stated in the Times article, I deduce that the authority’s debt are backed by the State of New Jersey, otherwise it would be self-evident that it should default, and sooner rather than later.

 

Eager to cut the state’s losses, Gov. Chris Christie in July endorsed proposals to lease the Izod Center and the racetrack in the Meadowlands to outside operators. But Gov. Christie was less precise about how the state would pay off the authority’s bonds, including those issued to pay for Giants Stadium.

 

“Believe me, I’m not unaware of the debt situation that was left here in my lap by decisions made by previous administrations,” Gov. Christie said, speaking from the 50-yard line at New Meadowlands Stadium. “But we’re just going to have to deal with it.”

 

Good luck, governor.  I mean that.

 

It sucks, it sucks, I know it sucks!