[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
BUILD IT AND THEY WILL COME: DO TAXPAYER-FINANCED SPORTS STADIUMS,
CONVENTION CENTERS AND HOTELS DELIVER AS PROMISED FOR AMERICA'S CITIES?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON DOMESTIC POLICY
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MARCH 29, 2007
__________
Serial No. 110-23
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.oversight.house.gov
U.S. GOVERNMENT PRINTING OFFICE
38-037 PDF WASHINGTON DC: 2007
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
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COMMITTEE ON OVERSISGHT AND GOVERNMENT REFORM
HENRY A. WAXMAN, California, Chairman
TOM LANTOS, California TOM DAVIS, Virginia
EDOLPHUS TOWNS, New York DAN BURTON, Indiana
PAUL E. KANJORSKI, Pennsylvania CHRISTOPHER SHAYS, Connecticut
CAROLYN B. MALONEY, New York JOHN M. McHUGH, New York
ELIJAH E. CUMMINGS, Maryland JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois TODD RUSSELL PLATTS, Pennsylvania
JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah
WM. LACY CLAY, Missouri JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts DARRELL E. ISSA, California
BRIAN HIGGINS, New York KENNY MARCHANT, Texas
JOHN A. YARMUTH, Kentucky LYNN A. WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of VIRGINIA FOXX, North Carolina
Columbia BRIAN P. BILBRAY, California
BETTY McCOLLUM, Minnesota BILL SALI, Idaho
JIM COOPER, Tennessee JIM JORDAN, Ohio
CHRIS VAN HOLLEN, Maryland
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
Phil Schiliro, Chief of Staff
Phil Barnett, Staff Director
Earley Green, Chief Clerk
David Marin, Minority Staff Director
Subcommittee on Domestic Policy
DENNIS J. KUCINICH, Ohio, Chairman
TOM LANTOS, California DARRELL E. ISSA, California
ELIJAH E. CUMMINGS, Maryland DAN BURTON, Indiana
DIANE E. WATSON, California CHRISTOPHER SHAYS, Connecticut
CHRISTOPHER S. MURPHY, Connecticut JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah
BRIAN HIGGINS, New York BRIAN P. BILBRAY, California
BRUCE L. BRALEY, Iowa
Jaron R. Bourke, Staff Director
C O N T E N T S
----------
Page
Hearing held on March 29, 2007................................... 1
Statement of:
Demause, Neil, author, Brooklyn, NY; Heywood Sanders,
professor, Department of Public Administration, University
of Texas, San Antonio, TX; and Michael Decker, senior
managing director, research and public policy, the
Securities Industry and Financial Markets Association,
Washington, DC............................................. 131
Decker, Michael.......................................... 165
Demause, Neil............................................ 131
Sanders, Heywood......................................... 144
Hogi, Joyce, Bronx, NY; Frank Rashid, Marygrove College,
Detroit, MI; and Nick Licata, president, Seattle City
Council, Seattle, WA....................................... 13
Hogi, Joyce.............................................. 13
Licata, Nick............................................. 47
Rashid, Frank............................................ 35
Humphreys, Dr. Brad, economist, University of Illinois,
Urbana-Champaign, Champaign, IL; and Dennis Zimmerman,
director of projects, American Tax Policy Institute, Falls
Church, VA................................................. 67
Humphreys, Dr. Brad...................................... 67
Zimmerman, Dennis........................................ 75
Korb, Donald, Chief Counsel, Internal Revenue Service,
Washington, DC............................................. 96
Murphy, Bob, president, Dayton Dragons, Dayton, OH........... 116
Letters, statements, etc., submitted for the record by:
Braley, Hon. Bruce L., a Representative in Congress from the
State of Iowa, prepared statement of....................... 178
Davis, Hon. Danny K., a Representative in Congress from the
State of Illinois, prepared statement of................... 62
Decker, Michael, senior managing director, research and
public policy, the Securities Industry and Financial
Markets Association, Washington, DC, prepared statement of. 167
Demause, Neil, author, Brooklyn, NY, prepared statement of... 134
Hogi, Joyce, Bronx, NY, prepared statement of................ 17
Humphreys, Dr. Brad, economist, University of Illinois,
Urbana-Champaign, Champaign, IL, prepared statement of..... 69
Issa, Hon. Darrell E., a Representative in Congress from the
State of California, prepared statement of................. 55
Korb, Donald, Chief Counsel, Internal Revenue Service,
Washington, DC, prepared statement of...................... 100
Kucinich, Hon. Dennis J., a Representative in Congress from
the State of Ohio, prepared statement of................... 4
Licata, Nick, president, Seattle City Council, Seattle, WA,
prepared statement of...................................... 49
Rashid, Frank, Marygrove College, Detroit, MI, prepared
statement of............................................... 38
Sanders, Heywood, professor, Department of Public
Administration, University of Texas, San Antonio, TX,
prepared statement of...................................... 146
Turner, Hon. Michael R., a Representative in Congress from
the State of Ohio, prepared statement of................... 92
Zimmerman, Dennis, director of projects, American Tax Policy
Institute, Falls Church, VA, prepared statement of......... 77
BUILD IT AND THEY WILL COME: DO TAXPAYER-FINANCED SPORTS STADIUMS,
CONVENTION CENTERS AND HOTELS DELIVER AS PROMISED FOR AMERICA'S CITIES?
----------
THURSDAY, MARCH 29, 2007
House of Representatives,
Subcommittee on Domestic Policy,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:30 a.m., in
room 2154, Rayburn House Office Building, Hon. Dennis J.
Kucinich (chairman of the subcommittee) presiding.
Present: Representatives Cummings, Kucinich, Davis of
Illinois, Tierney, Watson, Braley, Souder, Turner, and Issa.
Staff present: Jaron Bourke, staff director; Noura Erakat,
counsel; Jean Gosa, clerk; Nidia Salazar, staff assistant; Amy
Vossbrinck, scheduler, Office of Congressman Dennis J.
Kucinich; Erin Holloway, legislative assistant, Office of
Congressman Dennis J. Kucinich; Leneal Scott, information
systems manager; Jay O'Callaghan and Kristina Husar, minority
professional staff members; John Cuaderes, minority senior
investigator and policy advisor; Benjamin Chance, minority
clerk; and Meredith Liberty, minority staff assistant and
correspondence coordinator.
Mr. Kucinich. The Subcommittee on Domestic Policy of the
Committee on Oversight and Government Reform will now come to
order.
Without objection, the Chair and the ranking member will
have 5 minutes to make opening statements followed by opening
statements not to exceed 3 minutes by any other Member who
seeks recognition.
Without objection, Members and witnesses will have 5
legislative days to submit a written statement or extraneous
materials for the record.
Good morning and welcome.
This is the second hearing in a series of hearings on the
state of urban America. The series intends to take a closer
look at American cities, their progress, their problems and
their future. Today's hearing will examine the use of taxpayer-
financed debt for the construction of sports stadiums,
convention centers and hotels as well as recent regulatory
changes by the IRS that could significantly increase the use of
tax-exempt bonds for historically private activities.
Last week, our hearing looked at the subprime mortgage
industry and the problem of foreclosure, the payday lending
industry and the enforcement of the Community Reinvestment Act.
In the coming weeks, we will also take a look at the retail and
grocery store industries as well as access to health care in
the heart of urban America.
Today, we are taking a look at the use of tax-exempt
financed debt for the construction of sports stadiums,
convention centers and hotels. My own city of Cleveland has had
experience in this regard.
In 1990, the Central Market Gateway Project was formed to
develop new stadiums for the Cleveland Indians and the
Cleveland Cavaliers. Developers mounted a ballot initiative
known as Issue 2 and made claims in their paid advertising that
will sound familiar to our witnesses: ``Who wins with Issue 2?
We all do; 28,000 jobs for the jobless, neighborhood housing
for the homeless, $15 million a year for schools for our
children, revenues for city and county clinics and hospitals
for the sick, energy assistance for the elderly.''
The public relations campaign was coupled with hardball
threats from Major League Baseball to relocate the Cleveland
Indians. The initiative passed by a narrow margin and by 1996,
the total cost was up to $462 million, two-thirds of which came
from the public, and by 1997, that cost was still rising.
By the way, for the record, we did invite Major League
Baseball to testify today. They declined.
Cleveland had a municipal football stadium and an intensely
loyal fan base, affectionately known as the ``Dawg Pound.'' But
that wasn't enough and the Cleveland Browns left Cleveland for
a new stadium built with taxpayer subsidies in Baltimore. NFL
officials insisted that a new stadium and not renovations would
be necessary to get a replacement-football team. Cleveland
replaced its stadium with a football only structure paid for
primarily with tax money.
After spending hundreds of millions of taxpayer dollars to
subsidize stadiums for professional baseball, basketball and
football, Cleveland's economy does not show the appropriate
progress. We have among the highest poverty rates in the Nation
and one of the highest foreclosure rates. This month marks the
132nd month or exactly 11 years in which Ohio's job growth is
below the national average. This figure is unprecedented
nationally.
Whereas Ohio is growing slower than the rest of the
country, Cleveland is growing slower than the rest of Ohio.
During the 2000 recession, Cuyahoga County lost 75,733 jobs or
9.3 percent of all of its jobs.
The Gateway Project, which promised to generate tens of
thousands of new jobs ushered in a period of net jobs lost
since its construction. The Gateway Project neighborhood is
particularly striking because the neighborhood is even more
vacant and has even fewer jobs after the construction of the
Gateway Project than before.
Nationally, sports stadium construction is not effective at
boosting the local economy and revitalizing urban
neighborhoods. Academic research shows that on all counts,
sports stadiums add no benefit, no substantial economic benefit
to the cities in which they are built, no new jobs, new
additional revenue for schools, no new business, no additional
value.
In a review of the academic literature, economist Andrew
Zimbalist concluded, ``Few fields of empirical economic
research offer virtual unanimity of findings. Yet, independent
work on the economic impact of stadiums and arenas has
uniformly found there is no statistically positive correlation
between sports facility construction and economic
development.''
While taxpayer-financed stadiums do not seem to add to the
wealth of the public who pay for them, they do add to the
wealth of team owners. Consider the Detroit Tigers and the
Detroit Lions. We will hear about them and their stadiums from
one of our witnesses today. The value of the Detroit Tigers
rose from $83 million in 1995 to $290 million in 2001, the year
after the team moved into their new stadium. The Lions'
increase in value is even more dramatic, rising from $150
million in 1996 to $839 million in 2006.
Economic benefit to the team owners was certainly the case
for George Bush, who in 1989 spent about $600,000 to buy a
small stake in the Texas Rangers baseball team. During his
ownership, Mr. Bush and his co-investors were able to get
voters to approve a sales tax increase to pay more than two-
thirds of the cost of a new $191 million stadium for the
Rangers as well as surrounding development. Mr. Bush and his
partners also received a loan from the public authority charged
with financing the stadium to cover their private share of the
construction costs.
By 1994, the Rangers, in their new publicly financed
stadium, were sold for $250 million, a threefold increase in
value in merely 5 years and one that was largely attributable
to a new taxpayer subsidized stadium. Mr. Bush personally came
away with a profit of $14.9 million. In this case, the tax-
exempt financing indisputably benefited the owners of the Texas
Rangers.
Public financing of sports benefits the team owners but
not, according to academic consensus, the public. So is tax-
exempt financing of stadium construction an appropriate use of
taxpayer funds?
Well, the law on this matter is the 1986 Tax Reform Act. As
our witnesses will testify, the 1986 act removed sports
stadiums from the list of eligible private activities that
could be financed with tax-exempt private activity bonds. That
was the state of affairs until last year when the IRS issued
three rulings.
Two of them were private letter rulings favorable to the
Yankees and the Mets, allowing them to use previously
prohibited private payments for debt service on tax-exempt
bonds. Thus, the new Yankees and Mets stadiums can be built at
taxpayer expense. The third was a proposed rulemaking that
generalized the Yankees and Mets rulings. The effect of these
three rulings would seem to subvert the intent of the 1986 Tax
Reform Act as regards to public financing of sports stadium
construction.
Today, we will have the opportunity to hear from experts
from around the country as well as from the Chief Counsel of
the IRS on these questions.
[The prepared statement of Hon. Dennis J. Kucinich
follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. At this point, I would ask the witnesses to
stand.
[Witnesses sworn.]
Mr. Kucinich. Let the record show that the witnesses
answered in the affirmative.
I would like to introduce Ms. Joyce Hogi. Ms. Hogi has
lived in the Bronx, NY, for the past 30 years. Her apartment
used to look out onto the largest public park in the South
Bronx. That is Macomb's Dam Park, right?
She now looks onto a constructionsite for a planned parking
garage for the new Yankee Stadium.
She has been a community leader in the unsuccessful effort
to save public park land in her community from destruction to
make room for a new Yankee Stadium.
Why don't you begin with your testimony, and then I will
introduce the individual witnesses as we go along?
STATEMENTS OF JOYCE HOGI, BRONX, NY; FRANK RASHID, MARYGROVE
COLLEGE, DETROIT, MI; AND NICK LICATA, PRESIDENT, SEATTLE CITY
COUNCIL, SEATTLE, WA
STATEMENT OF JOYCE HOGI
Ms. Hogi. Good morning. My name is Joyce Hogi. I am a 63
year old widow who has lived in the Bronx for the past 30
years, specifically the South Bronx area surrounding Yankee
Stadium. Thank you so much for this opportunity to submit
testimony concerning the community's reaction to the alienation
of our public park land for private use by the Yankee Stadium
organization.
This morning, I will tell you the sad story of how 22 acres
of park land primarily known as Macomb's Dam and the southern
portion of John Mullaly Parks were taken from our community,
how the shameful consequences of the construction of the new
stadium is on the destruction of our parks.
I have laid out my testimony in three sections.
The importance of the parks to the community: Macomb's Dam
was opened in 1899. It immediately drew neighborhood children
and aspiring athletes to its extensive recreational facilities.
The quarter mile track was a favorite for local and European
runners. The track was named Joseph Yancey Track and Field in
honor of the co-founder of the New York Pioneers Track and
Field Club, an interracial team that developed many Olympic
athletes.
These parks are located in the poorest congressional
district in the United States but were essentially our Central
Park. It was one of the few linear parks in New York City.
These parks continued to be used for sports activities for both
adults and youth after all these years. They were invaluable to
us. They contained a soccer field, a running track, two
baseball and softball fields, handball and 16 tennis courts.
The process that set in motion the demolition of our parks
had no standard and was arbitrary and capricious.
The overall view from the New York City Department of Parks
and Recreation stated that it proposed to allow for the
redevelopment of a new Yankee stadium by the Yankees on
portions of those parks adjacent to the existing stadium site.
This new open air stadium with a capacity for 54,000
spectators, which I might add is 4,000 less than the current
facility seats, would replace the existing 82 year old stadium
which can effectively accommodate a modern baseball team and
provide greatly improved spectator and parking facilities. This
project proposes to construct four new parking garages.
This statement sounded the death knell for the parks and
for the thousands of residents and school children in an area
deficient of parks, exacerbating other problems already
experienced by us. After our initial shock, we came together as
a community.
Our New York State legislators, on a day at the end of the
legislative session when hundreds of bills were passed, removed
the protections ensuring that our beloved parks would remain
undeveloped in perpetuity. They decided it was in our best
interest to offer a parcel of land that is 40 percent bigger
than that of the World Trade Center, not for a public good but
to enrich a private business.
We at SaveOurParks! obtained the transcript from the
assembly and were just stunned to see how casually the vote to
relinquish our beloved park land in such an impoverished
community was conducted. Despite the fact that no efforts were
made to inform the community of the impending park alienation,
the assembly member who introduced the bill proclaimed no
community opposition to the project. We were shunned by our
elected officials, and we were accused of bringing in
professional protesters by Randy Levine, president of the
Yankees Organization, as if the community could not discern
when it was getting a bad deal.
The media mostly was enamored and was not able to
understand the community's point of view as the Yankees had
hired Howard Rubenstein Associates, a major well connected
public relations firm in New York City to provide a steady
stream of material to all the media outlet, selling their
projects.
While some newspapers would print an occasional account of
the proceedings, Patrick Arden of Metro New York got it and he
stayed on the case. He understood the injustices. He showed up
at all our hearings. He wrote about it every chance he could
get.
SaveOurParks!, supported by other organizations seeking
alternative transportation, believed that everything should be
done to encourage mass transportation to alleviate the need for
the garages. We are in a highly affected asthma community.
We argued for improved subways, the building of a Metro-
North station at Yankee Stadium and for the rehabilitation of
the neighborhood's Melrose train station on the Harlem and New
Haven lines. We argued for train tickets tied to game tickets
as an incentive to use mass transit. We have a congressional
appropriation for $2.4 million to upgrade the Metro-North
stations in the Bronx and to construct a stadium at Yankee
Stadium. Everything seemed to be lined up for a station, but
the project did not address it.
Economic development for the community will occur as a
result of this new stadium, we were told by the supporters. We
contend that economic development will occur as a result of our
changing times, not by a stadium. The New York Yankees have
been our neighbors for over 80 years. Given the poverty and
unemployment rates in the South Bronx, it would seem that no
economic benefits have been realized of having the legendary
Yankees in our community.
We were told at a contentious community board meeting by
parks officials that we are getting bigger and better parks
that we would not get if the Yankees weren't building a new
stadium. We already had funds allocated to refurbish those
parks, and the waterfront parks that we were promised were
already included in the plan by the city to build pathways
along the entire Harlem River. So it did not need to be a part
of this project.
Additionally, the replacement parks we are promised are
scheduled to be built atop concrete parking garages and are
subject to closure on game days for security reasons.
Macomb's Dam Park was renovated in the 1980's with Federal
funds. To gain approval to convert this park to a non-park or
private use required that the following criteria be met: that
the review must look at practical alternatives for the project,
that new park land must be of the same market value and that
new park land must be of equivalent usefulness and location.
None of these applied.
The plan states that the Bronx does not have enough quality
park land in the first place. It also says that new park land
is supposed to be easier for people with disabilities to get
to. The parks on top of parking garages are not easier.
The consequences for Macomb's Dam and portion of John
Mullaly Parks caused by the construction of the new Yankee
Stadium, in a word, shameful. Imagine living across the street
from a major development, 100 feet or so, with trucks lining up
outside as early as 4 a.m., idling for up to an hour or longer.
Imagine dust coming into your apartment that cannot be
controlled regardless of how tightly your windows are closed.
Imagine mud and water ponding on the streets in front of you.
Imagine, if you will, the noise from jackhammers going
nonstop. I have had residents tell me they leave home during
the day because they cannot stand the noise.
Imagine water from your taps running brown from who knows
what.
Imagine trying to cross a busy street with children or as
an elderly person dodging traffic because drivers are losing
patience with trying to maneuver around all the truck traffic.
Imagine the tennis center vendor who lost nine of his
courts to the construction but was told he could operate until
the end of April 2007. He received a letter from DPR, the
Department of Parks and Recreation, a week before he had to
close the remainder of the courts on February 28th because
construction was ahead of schedule and storage equipment would
now occupy that space.
Imagine the drone of helicopters flying over the
construction area up to 7 days a week.
Our parks and over 400 trees were sacrificed to make room
for the new stadium and four new parking garages. The stadium
will sit in a residential area 100 feet from several fully
occupied apartment houses. Residents of these buildings will
face a monolithic 14-story wall enclosing the stadium isolating
residents, even the numerous Yankee fans, from the
neighborhood. Imagine the trees you are used to seeing outside
your front window.
There has been a total lack of accountability during the
construction.
Finally, around midnight, Sunday, August 13, 2006, the
Parks Department staff came into our community, closed off this
lovely tree-lined 167th Street, put up fencing around Macomb's
Dam Park, posted security guards and trucked what was later
determined to be very high quality mulch to put around the
trees as a backdrop for the groundbreaking of the new stadium
scheduled for a couple of days later.
When residents arrived on Monday morning for their walks,
jogs on the track, they were told this is private property and
they weren't let in.
The day after the groundbreaking, the trees were cut down.
We had counted on the National Park Service to protect us.
We found later on they were complicit with the city, the State
and the Yankees prior to our learning about the project to hand
over those federally funded parks to the Yankees.
Thank you very much.
[The prepared statement of Ms. Hogi follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. I want to thank the witness, Ms. Hogi, for
her participation in this.
Before I introduce the next witness, I want to ask the
witnesses to endeavor to keep their testimony to 5 minutes, and
your entire testimony will be included in the record of the
proceedings.
At the end of this first panel, our ranking member, Mr.
Issa, will be making a statement, and all other Members who
wish to have their statements put in the record will be so
ordered.
At this point, I would like to introduce Mr. Frank Rashid.
Is that the right pronunciation?
Mr. Rashid. Correct.
Mr. Kucinich. Mr. Rashid is a professor of english
literature and the English Department Chair at Marygrove
College.
He has lived in Detroit, MI, his entire life and was a
founding member of the Tiger Stadium Fan Club. The fan club
engaged in a successful decade-long battle to block public
stadium subsidies in Detroit.
Mr. Rashid is on the advisory board of Wayne State
University Press' Michigan Writers Series and serves as vice
president of the Michigan Association of Departments of
English.
Welcome to this committee. We look forward to your
testimony.
STATEMENT OF FRANK RASHID
Mr. Rashid. Thank you very much.
Good morning. I thank the Members of this honorable body
for inviting me to testify about my experiences in fighting
against public subsidies for stadiums.
Mr. Kucinich. Would you like to start over and keep that
mic close?
Mr. Rashid. Sure.
Mr. Kucinich. I would ask all witnesses to keep the mic
relatively close. Thank you.
Mr. Rashid. Thank you for inviting me to testify about my
experiences in fighting against public subsidies for stadiums.
In 1987, four friends and I formed a group intended to save
Tiger Stadium, the home of the Detroit Tigers. We began our
efforts by highlighting the stadium's distinctive history and
its role as common ground for generations of Detroiters. We
discovered, however, that the most compelling reason to save
the stadium was to save public money, and we committed to a
fight to prevent public stadium subsidies. That fight lasted
nearly 10 years.
We used every legal method to block public stadium
financing, but we finally ran out of options and money. The
Tigers moved into Comerica Park in 2000. Two years later, the
Detroit Lions, who in 1975 had moved to a publicly financed
suburban stadium, returned to Detroit again helped by public
subsidies. Downtown Detroit now has two new stadiums absorbing
hundreds of millions of dollars in direct public financing.
Local officials promised that these stadiums would bring
new jobs, economic spinoff, contracts for minority firms and
increased city revenues for more police and city services. Not
one of these promises has been fulfilled. In the last 2 years,
the city has hosted the All-Star Game, the Super Bowl and the
World Series, but city residents have seen no benefits from
these events. Detroit faces a financial crisis and has to cut
police and fire protection, library hours and trash pickup.
Comerica Park and Ford Field have operated for six and four
seasons, respectively, but the blessings of major league sports
have yet to rain down upon us. Franchise value and ticket
prices, however, have increased dramatically. In effect, we
gave hundreds of millions of dollars to two billionaires so
they could increase their wealth and raise their prices.
Detroit's two stadiums suck up resources that could go to
schools, police, libraries, parks and proven development
strategies. The Michigan Strategic Fund was established in 1984
to promote economic development and create jobs. Wise
stewardship of this fund could have helped to address
Michigan's economic crisis. Instead, we wasted much of it on a
stadium that employs the same number of people as the one it
replaced.
Replacement stadiums like Comerica Park and the proposed
New York stadium absorb ancillary revenue-generating activity
for the team owner, eliminating small businesses, parking lots,
souvenir stands, bars and restaurants that contribute more to a
local economy than one large recipient of abatements and
subsidies.
Detroit must close 30 public schools, but we have two new
stadiums. We have shut down several public library branches and
restricted hours in those that remain. We have few organized
Little Leagues, and we can't maintain parks and playgrounds for
children, but we have two stadiums for the big leagues and
their millionaire athletes.
Detroiters have to report accidents and crimes at police
precincts, and we must travel further now to do so since the
police department has replaced 15 neighborhood precincts with
six centralized districts. Our mayor proposes days off without
pay for city workers including fire and emergency responders
and curtails trash pickups, but the two new stadiums receive
plenty of police protection and their trash always gets
collected.
We call animal control and get no answer. We report a
dangerous building and get placed on hold. We call 911 and get
a busy signal. We pay the highest millage rate of any
municipality in southeast Michigan. We can't afford enough
emergency workers and phone lines, but we have two new
stadiums.
Detroit needs solutions that would come from a
comprehensive urban policy that equitably distributes resources
and opportunities. We can list strategies that would strengthen
our city and improve our quality of life. Two new stadiums are
not on this list.
But stadiums offer politicians the appearance of
accomplishment. With limited available funds, Detroit officials
focused on stadiums because their powerful beneficiaries--major
league sports, team owners, developers, bond attorneys,
construction firms, building and trade unions--would support
the campaign to make them happen. Our local leaders persuaded
voters that stadiums would solve myriad social problems. They
pushed the projects through approval quickly with as little
legislative oversight as possible, then sold the stadiums to
the public and then dispensed the funds.
At first, we were incredibly naive about all this. We
assumed that leaders of cash-strapped cities and counties
wanted to save money. Our self-financing stadium renovation
plan received praise from architects, stadium experts and
baseball historians, but most politicians dismissed it.
Finally, a sympathetic development consultant explained to
us that its budget was too small and it required no public
money. We should have made the project bigger, he said. How
could we expect politicians to be interested when we gave them
no role?
I now understand why so many wasteful schemes receive
funding while proven strategies get no support. Publicly funded
stadiums are distractions from purposeful solutions to the
urban crises.
As a lifelong Detroit resident, I am grateful to the
members of this committee for holding hearings on the state of
urban America and especially grateful for allowing me to
participate.
[The prepared statement of Mr. Rashid follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Thank you very much, Mr. Rashid.
I want to note my gratitude for the presence of my
colleagues, Mr. Davis, Mr. Tierney, Mr. Braley, Mr. Turner and,
of course, Mr. Issa.
I would like to introduce our next witness, Mr. Nick
Licata. Nick Licata is the president of the Seattle City
Council in Seattle, WA.
Mr. Licata has a history of civic activity and community
involvement. Among his list of activities, he was Co-Chair of
Citizens for More Important Things. The group opposed excessive
public funding for professional sports stadiums.
Welcome, Mr. Licata, and you may proceed.
STATEMENT OF NICK LICATA
Mr. Licata. Thank you. Thank you, Chairman Kucinich and
Ranking Member Issa and members of the Subcommittee on the
Domestic Policy for asking me to speak to you today.
I am Nick Licata, as was pointed out, a Seattle City
Council Member and for the past 12 years have been at the heart
of Seattle's debate about the use of public funding for
professional sports stadiums.
In 1995 before I was elected to the City Council, I did
indeed co-found the Citizens for More Important Things along
with Chris Van Dyk and Mark Baerwaldt, two other businessmen.
This group fought the use of taxes to construct three stadiums
for professional sports organizations over the past dozen
years, and appendix 1 that you have provides a chronology of
the efforts to secure public funding for these facilities in
Seattle. It is a pattern that has been repeated across the
Nation where perfectly useable facilities are declared too
shabby for the home team.
Seattle rebuilt our Seattle Coliseum in 1995 to the
specifications of Seattle's professional basketball team.
Mr. Kucinich. You can hold on for a minute until we get
these buzzes.
Don't believe the 15 minutes. You will have your time.
Mr. Licata. OK, great, this will be shorter than 15
minutes.
I would like to outline three experiences, the first with
our professional basketball team. In 1995, Seattle rebuilt our
Seattle Coliseum to the specifications of this professional
basketball team, the Supersonics, and we created the state-of-
the-art NBA Key Arena at a public cost of $75 million. The sale
of luxury boxes was to pay for the construction of those bonds.
When the team could not sell enough luxury boxes, basically,
the city had to pick up the tab. Nine years later after the
city has paid millions annually, over $6 million a year
annually and over half the public debt still outstanding, the
team said they wanted a new facility because it was outdated.
What happened then was that when they got the cold shoulder
from the politicians and the public, the Sonics were sold for
an estimated $80 million profit for the new owner who now wants
the public to contribute $400 million for an even bigger
facility.
In the case of our baseball team, in 1995 while the city
was remodeling the Coliseum for the Supersonics, our
professional baseball team, the Mariners, declared that their
venue, the 18 year old Kingdome, was obsolete for baseball and
threatened to leave Seattle if they were not provided with a
new stadium with a retractable roof at the cost to the public
of over $300 million. The previous year, the county had spent
$73 million repairing the Kingdome's leaky room where they
played, and a few weeks after local voters rejected a sales tax
to pay for the new Mariners stadium, the State legislature met
in emergency session to approve a tax package that eventually
built it despite voters' wishes.
In the case of our professional football team, the Seattle
Seahawks, seeing how successful the Mariners were, demanded
they too wanted significant remodeling of the Kingdome and they
threatened to move to California if they did not get it. Before
they could move, Microsoft founder Paul Allen purchased the
team, subject to public approval of a $300 million public
funding package. He spent $7 million on the election, outspent
the opposition at least 1 to 20 if not 1 to 40, and won the
election by 00.2 percent. The Kingdome then was imploded with
still $100 million debt unpaid.
Now what does this pattern reveal? It says just what our
city staff discovered when reviewing the life of professional
sport facilities around the Nation. When public money is used,
professional sport facilities are remodeled every 6 years.
Why? Because public money is readily available and free to
the teams.
Where does this money come from? Proponents have argued
that these taxes are insignificant since they are on restaurant
meals, hotel rooms, car rentals and other retail purchases.
This mixture of revenue streams does mount up. If pending State
legislation in our State passes for the new Sonics basketball
arena and a speedway for NASCAR as they are also requesting
public funding, our city, county and State governments will
have contributed $2.3 billion over the past two dozen years for
new professional sport venues.
Our own Seattle experience has shown that the cost continue
to go up. Appendix 2 that you have shows that certain crimes
increased around the two new stadiums from what they had
previously been in the same neighborhood, contributing to
increased public costs.
In ending, let me say that our economy, the Seattle
economy, had a downturn. There was a National downturn, but our
stadiums in no way contributed to lessening that downturn and,
in fact, took money away from Seattle that we could have spent
in providing basic services to our citizens.
[The prepared statement of Mr. Licata follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Thank you, Mr. Licata, president of the
Seattle City Council, for your testimony.
We are now going to have the statement of the ranking
member, Mr. Issa, and at the conclusion of that, we will take a
short recess to go vote.
Mr. Issa, you may proceed.
Mr. Issa. Thank you, Mr. Chairman.
I am particularly happy that we are having this hearing
today because I believe Mr. Chairman and I think former Mayor
Michael Turner who is also going to be participating here today
would agree that there are right ways and wrong ways to do it.
I think it is very insightful for us, even though we don't
have prime jurisdiction, through our granting of tax-exempt
status for these projects, federally tax-exempt status, to
evaluate whether they should be done under the conditions they
presently are. We have individuals from the IRS and other bond
officials that will be testifying later.
I think that very much it is going to cause us to look at
the good, the bad and, as I heard today, in many cases what you
would say would be the ugly.
I have the privilege, though, of representing the city of
San Diego, and I have firsthand knowledge of the economic boom
that resulted from our newly built baseball park, PETCO Park,
which is the home of the National League West Champions, the
San Diego Padres. Our story was different than the ones I have
heard in your cities. In November 1998, over 60 percent of San
Diego's voters approved Proposition C. The MOU between the
Padres and the city of San Diego and the City Center
Development was the only legislative action required for the
baseball park.
We went through more than 5 years, though, of litigation by
one after another individual, some of them particularly notable
being landowners of a warehouse district, a district that
didn't have individuals living there and by most people's
standards, even though it was a downtown distance within
walking distance of our finest oceanfront area, was in fact
blighted. The owners did not say they didn't want to sell. They
simply said they wanted to be made a lot more for warehouse
districts. They were paid a lot more than would be based on the
tax rolls in that district, a lot more.
After the successful condemnation and 5 years of
litigation, PETCO Park was built in what had once been a
blighted warehouse district.
Today, we have 7,385 residential units in that district.
These are units of choice. These are expensive units. These are
units that range up into the multimillion dollar range, and
these are units that were 100 percent sold because San Diego
became revitalized around this project. This project was not
squeezed in. It was designed from the ground up.
We also have added 747 new hotel rooms, again over 90
percent filled.
The direct documentable economic value is $3.73 billion of
property tax evaluation increase. Now, in California, you just
take 1 percent of that or $37 million and you would get the
direct property tax revenue increases. Needless to say, we are
talking in multiples of that when you look at our revenues from
sales tax and others.
Quite candidly, if baseball players were required to be
residents of the State of their home team, it wouldn't help you
in Washington, but in California that would add roughly 10
percent of their often high salaries to the economic revenue.
I am proud to say that John Moore, the owner of the Padres,
does contribute heavily to local baseball and softball. He has
built every single year a new, at his cost, baseball facility
for the youth around the city and the county and continues to
give back and give heavily.
We were fortunate. We had a multi-billionaire who moved to
San Diego and bought a team that was in trouble and has
invested net in it and in the redevelopment, from day one, said
that he wanted that to be a redevelopment that was a positive
for the city.
It is an unusual story to tell, but I wanted it told
because as I hear with more than little bit of dismay how
cities can go wrong, I also want all of us to realize that it
can be done right and hopefully will be done right in the
future perhaps because of tax policies that we work on here
today.
Mr. Chairman, I thank you and yield back.
[The prepared statement of Hon. Darrell E. Issa follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. I thank the gentleman.
This committee will take a 15 minute recess, at which time
we will return to question the witnesses. Thank you.
[Recess.]
Mr. Kucinich. This is a hearing of the Domestic Policy
Subcommittee. I am Congressman Dennis Kucinich from Cleveland,
OH, the chairman of the subcommittee.
The title of our hearing today is, ``Build It and They Will
Come: Do Taxpayer-Financed Sports Stadiums, Convention Centers
and Hotels Deliver as Promised for America's Cities?''
We have heard from our first panel, and now we are going to
have questions. I am going to have at least one question for
every witness, and I would like to ask each of you the same
question, and I ask for a brief response. We will start with
Ms. Hogi.
Does building a new sports stadium bring growth,
revitalization or prosperity to the city and neighborhoods?
Ms. Hogi. I would answer no, not in the way that it was
done to Yankee Stadium. Were there more involvement with the
community who had great suggestions of how to fashion this new
stadium, it would have involved a big infusion of economic
growth to the area.
Mr. Kucinich. Mr. Rashid.
Mr. Rashid. I would say that even in cases where it appears
that a stadium hasn't done any harm, it is rare that if you
really look at the numbers, it could do any good. There are so
many more important things that we can do as cities and as a
society to serve our people with public money, that there
really is very little excuse for wasting hundreds of millions
of dollars on publicly funded stadiums.
Mr. Kucinich. Council President Licata.
Mr. Licata. I have not seen any visible evidence that the
neighborhoods that the stadiums have been located in have
benefited in any significant or even marginal way, and as I
pointed out in our appendix 2, we do know that our public
safety costs have gone up.
Mr. Kucinich. I have another question. I would like to ask
each of you to answer, and I would ask again for you to make
your response brief.
What, in your opinion, motivates team owners to seek public
financing for new stadium construction? Ms. Hogi.
Ms. Hogi. In a word, greed.
Mr. Kucinich. Mr. Rashid.
Mr. Rashid. I would say that it is a tremendous opportunity
for private business to increase its profits and the value of
its business by shifting the costs of its physical plant onto
the public, and then basically they charge. The public incurs
the risks, and the private owner takes all the benefits.
Mr. Kucinich. Mr. Licata.
Mr. Licata. Basically, they see the opportunity to shift
the risk to the public sector. So, therefore, their profit
margin is protected, and they have a better opportunity for
running a more profitable team.
Mr. Kucinich. OK, I want to thank this panel for its
participation.
I want to ask does Ms. Watson have any questions of this
panel.
Ms. Watson. Thank you all for coming.
I just want to add a comment. I think this is a very
significant question at this point. How do we benefit in our
cities?
I am from Los Angeles and represent Los Angeles, Hollywood
as well, and I just want to say that we have been trying to get
a football team in our coliseum. Well, all of them want the
proceeds from parking. I just want to know if that is the case
as well. The proceeds from parking go to support the School of
Science and Math that we have built in that complex. And so, we
have, not for years, had a team. I find that they want
everything within the surrounding area.
We are just lucky in that area because we have the
University of Southern California that is well endowed and
receives a lot of grants for research. We are trying to really
build the heart of South Central, and that is where it is.
In New York, are all of you New York? Oh, well, in your
cities, are you finding same thing? If they do come in, it will
benefit them and they pay tremendous wages to their players and
all, but it doesn't necessarily build a community. I would like
to have a comment from you.
Mr. Licata. Well, I can kick off and say that specifically
regarding parking in both instances, the stadiums and now
basketball arena, the parking revenue used to go to the city
which we use for general funds which is basically for
everything. When they move in, they want the revenue from the
parking, so that is a pattern we have seen in our city.
Mr. Rashid. I would say that overall what happens when a
new stadium is built in Detroit in particular, the whole idea,
part of the plan of building the stadium was so that the owner
could absorb revenue-generating activities that were formerly
controlled by smaller independent business people as well as
churches and programs that did it for fundraising, used parking
revenues and other revenues for fundraising as ways of
supplementing their funds. These were programs, for example,
for young women in trouble or for churches that were running
soup kitchens.
So, basically, what happened when we moved to a new stadium
was that now the owner controls all of that parking. And those
activities don't have that same advantage. It is a net loss.
Ms. Hogi. My colleague on the next panel, Mr. deMause,
would be more proficient in that area than I. I can say that
the parking garages are operated by private vendors in New
York. Other than the regular business tax, I don't see how it
benefits the area.
The one big parking garage right now is closed to the
community on non-game days. So, essentially, it sits fallow.
The four new garages that are scheduled to be built are being
built for the fans, the spectators, not for the community. So
it is not even a year-round revenue. As a matter of fact, they
have not found a private developer yet to build those parks.
Mr. Kucinich. The gentlelady's time is expired.
Ms. Watson. Thank you, Mr. Chairman.
Ms. Hogi. OK.
Mr. Kucinich. I thank the witness for her testimony.
We now are going to have questions from Mr. Souder.
Before we get to Mr. Souder, I just want to say that,
without objection, at the conclusion of panel one in deference
to the inevitable time constraints of the IRS, we are going to
have a change in panel two. We are going to be hearing from
Dennis Zimmerman, Brad Humphreys and then the IRS in panel
three. In deference to the minority, we are going to move up
the order of testimony on panel four to hear from the witness
from Dayton. Without objection, so ordered.
Mr. Souder.
Mr. Souder. Thank you. I am sorry I missed the testimony. I
was scrambling through here to try to catch up a little bit. I
just had a couple of basic questions and let me put a couple
together and then I would be interested to hear your responses.
Do you believe that it is always a bad idea or do you
believe that bad deals were cut?
In other words, in St. Louis, my understanding is when they
did the redevelopment there, they worked because some of it had
public housing in it. They worked some agreements with the
public housing groups, and they had some of the low income
housing restored which they would have not been able to do had
they not done the stadiums.
So I am wondering even like in the case of Seattle and
Detroit or, for that matter, New York, a second question rises,
and that is this intangible because I share your concerns that
it seems like the owners of the teams particularly when they
resell and make horrendous amounts of money and they sell lots
of food in the stadium, control some of it. I share a lot of
those concerns.
At the same time, there are some intangibles in downtown
development like core city image. Detroit, for example, had the
Tigers. It is one thing to say keep the historic structure. It
is another thing what if they had moved up to Pontiac or out to
the suburbs. What if, in Seattle, they had gone out into the
suburbs? What about if, in New York, they went out even further
into Long Island?
In fact, one of the intangibles that you get here is that
suburbanites will come into the urban center. It helps the
image of the city.
Then last with this same kind of intangible question, the
fact that some cities didn't get the return that they thought,
is that related to other things that weren't in control and was
it, in fact, a zero sum game that the money wasn't put in
crime, the money wasn't put in downtown development?
Or, for example, in downtown Detroit, is the problem so
systemic that no matter what is done? From what I can tell
there has been some change. The casinos may, unfortunately be
more a part of it than the sports. I would be interested in
some comments.
Mr. Licata. Why don't we just go down the row? Regarding
the question, could some projects be more successful than
others depending on what the mixture, you would have to
investigate that city by city and process by process.
I can say that in our situation with the professional
basketball team, the citizens voted over 70 percent to say that
yes, we will put money in. We just want a fair rate of return,
looking at, say, a percent of what we earn on Federal bonds,
pretty meager, and the public turned it down. So I think the
public wants something very visible, and they want a good fair
return.
On the image, that is almost immeasurable. But I can say
that in Seattle's case vis-a-vis the city of Vancouver, BC, who
we compete with on a image-Pacific-international basis, they do
not have the kind of professional teams we have. We are
fighting for them every day for business, so it doesn't seem to
give us any advantage over them.
Mr. Rashid. I think that this is a false dilemma. We are
not really, if you really want to look at what a project will
do, at the beginning of a project, you have an opportunity to
examine, do a full independent cost-benefit analysis. If we are
going to spend this money, is this the best possible use? That
is an opportunity for a community to really look at what is the
best possibility.
From an independent analysis, if that happens and if
stadiums come up there at the top of the list, then fine, make
sure that happens. Make sure that works.
But you know there are all kinds of wonderful places in the
United States to live that don't have professional sports. It
is not like my life as a Detroiter is really directly hit by
professional sports. If it were, we have had the World Series,
the All-Star Game and the Super Bowl in the last 2 years, and
we have terrible budget deficits. Nothing has happened to touch
the people of Detroit as a result of having professional
sports.
We have had the top events and all of the television
exposure. Is your image of Detroit really significantly
improved by having those kinds of events and that kind of
exposure? You can't eat image.
Mr. Souder. Winning the World Series might.
Ms. Hogi. I believe Mr. Rashid in that, and New York is
unique. Yankee Stadium is only used for Yankees games. During
off season, it is an economic dead zone not just to the
community, but nothing happens there. Nothing happens. We are
just looking at closed garages and an empty stadium.
Mr. Kucinich. The gentleman's time is expired.
Mr. Davis.
Mr. Davis of Illinois. Thank you very much, Mr. Chairman. I
want to thank you for calling this important hearing.
In my congressional district, I live in Chicago. We have
actually built three complexes in the last several years, all
in my district. In the 1980's, what is now Cellular Field, Sox
Park, the home of the Bulls, the stadium where the
championships were won and a new McCormick Place.
In each instance, there were proposals that community
residents and civic groups were not in favor of. For example,
the first one at Sox Stadium or Cellular Field, there was great
fear that Wentworth Gardens, a public housing development,
would be totally wiped out. However, as a result of community
interaction and action and protest and demonstration and
negotiation, Wentworth was left intact. Lots of negotiation
took place around the building of the stadium and concessions
were made.
My question is how impactful have community protests or
community positions been in each one of the instances in which
you have been involved?
Ms. Hogi. I would like to go first on this one because in
our case, we have a time line that shows how quickly our parks
were alienated before the community knew about it. There was no
community involvement. Our previous borough president had a
plan for a Yankee Village that included a new or renovated
stadium, numerous business ventures that no one even looked at.
So had we had the chance to interact, we could have provided a
lot of good input that would have minimized the opposition to
that project.
Mr. Davis of Illinois. Yes.
Mr. Rashid. We appeared to have some success in delaying a
stadium project over time, and in fact the mayor of Detroit
once said that we had helped by not getting a bad stadium
project built. However, in retrospect, I think that no matter
how much we did, the fact that we now have two stadiums in
downtown Detroit absorbing huge amounts of public revenue or
public resources shows that we really didn't have tremendous
effect and that when the powerful interests wanted to
collaborate on a stadium project got together, it really didn't
matter how much the citizens could do.
The citizens really, in our final campaign, we had about
$25,000 to run against a $600,000 or more public relations
campaign. There was no way we could effectively get our word
out against that.
Mr. Licata. To the extent that communities can get
involved, then the stadiums or arenas that are built will
probably include some amenities to the immediate communities in
that vicinity of those institutions, but they will not, in the
long run, be able to forestall or stop the stadiums or arenas
from being built.
Generally, what I have seen is that those in favor of those
construction projects cherry-pick the leaders of what they want
to represent the various communities. So it is I don't want to
say a stacked deck, but it is definitely marked.
Mr. Davis of Illinois. Let me just ask finally, are you
opposed to public financing in part or do you think that there
is room for public-private partnerships in the building of
these kinds of facilities?
Ms. Hogi. Public-private partnerships, definitely.
Mr. Rashid. I think that each project has to be looked at
very carefully and really independently analyzed, and that is
the problem. Right now, there is no independent analysis. I
think if there were, we would see considerably fewer publicly
funded stadiums and a lot more money from the private sector in
those projects.
What happens now is there is a real interest. There is a
whole set of powerful interests that can control the debate.
What really needs to happen and where I think Federal
enforcement would be very valuable is in establishing
requirements that there be real solid and verifiable analysis
for each project, and that is not done.
Mr. Kucinich. The gentleman's time is expired.
Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
Mr. Kucinich. Thanks, Mr. Davis.
[The prepared statement of Hon. Danny K. Davis follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Mr. Issa.
Mr. Issa. Thank you, Mr. Chairman.
In my opening statements, I think I made it clear that San
Diego views itself as an exception, not an exception to
lawsuits that tried to delay, perhaps an exception in that many
of the people who were involved in the suit simply wanted more
money for a warehouse than they had paid for it a few years
earlier which sounds like many of your opening statements and
the chairman's opening statements about professional sports
teams. So I think when there is an opportunity, there is no
question. There are people who are opportunists.
But for this committee, even though we don't have the prime
jurisdiction over taxes to say the least, a lot of what we have
in Congress is tax authority, the ability to evaluate and to
tighten up the standards or, candidly, loosen the standards on
what gets tax-exempt bonds which, as you all know, makes a big
difference in whether a city will go forward. If we don't grant
a tax-exempt bond for a new sewer system, it increases the
price of the sewer system. If we do provide tax-exempt status
for a baseball park, it reduces the cost through a Federal
subsidy.
For each of you who have both obviously the public
participation at the city level but the Federal Government
contributed to these projects, what conditions would you say we
should look at insisting on before we grant the tax-exempt
category which is our primary authority here in Congress for
these projects?
In other words, when we say to a city, county or State, yes
or no, we will grant, what should these projects have to do in
your opinions?
Mr. Licata. I will kick off.
I think the bottom line is that the public wants to be put
in the same position as the business investors. They want a
fair rate of return. If there is some way that the Federal
Government can say that in order to get tax-exempt status on
these bonds, we have to see a definable, measurable benefit to
the public.
I am not sure how you go about doing that, but I think that
would certainly go a long way to solving this problem.
Mr. Issa. Would the first step be a positive tax revenue to
at least a combination of city, State and Federal Government?
Mr. Licata. That would be a good first step.
Mr. Issa. Mr. Rashid.
Mr. Rashid. I am not certainly an expert in this.
Mr. Issa. Nor are we; we just got elected to do it.
[Laughter.]
Mr. Rashid. I do believe that every project has to be
absolutely independently verified. What happens in projects,
the way they are sold both to local politicians and to the
public is by creating studies that ignore most of the
information that is relevant to the project. I would insist
that in doing, in creating these studies and providing this
analysis, that it be done independently, that it be verified
independently and that alternative uses for moneys for these
projects be a part of whatever study is done, and that is not
done.
I also think that the campaigns that are used to sell these
projects have to be looked at carefully. There is almost a need
for some kind of campaign finance reform at the local level in
the way that those projects and those campaigns are funded.
Mr. Kucinich. Would the gentleman yield?
Mr. Issa. I would be happy to yield to the chairman.
Mr. Kucinich. The witness raised a point which I think may
be worth the committee looking at as a followup, and that is
the campaigns to pass these issues. What do they promise? It
might be interesting to collect information from all the cities
we are hearing from plus others to see how the promises
correspond to the reality.
I thank the gentleman.
Mr. Issa. That is excellent.
I might mention that we do have two other pieces of
jurisdiction for the final answers before my time expires. One
is we do have campaign finance. We could consider that if it
lobbies for what would ultimately be tax-exempt bonds, that we
could put it under the Federal limit of $2,300 rather than, in
some States, unlimited, and that would be our jurisdiction.
Last but not least, you might remember that we, in the
previous Congress, had professional sports up here to talk
about steroids. We do have the jurisdiction, and perhaps the
chairman would consider having as a followup to this,
professional sports teams talking about this growing
competition that makes these projects so expensive because I
think you have victimized in your local cities in many of the
things you have said.
But we also have the concern that there is a race to go
higher and higher. Are we racing to where your cities will lose
what you have unless, as you said, ante up another $800
million?
I want to leave time for you to answer on any other ideas
that would help us here on the dais.
Ms. Hogi. The project should benefit all. As I said, Yankee
Stadium is an economic dead zone during off season. So I don't
think my taxes should go to supplement this team that can't
benefit me year-round.
Mr. Issa. Thank you.
Thank you, Mr. Chairman.
Mr. Kucinich. I thank the gentleman. It may be, Mr. Issa,
that tax-exempt financing for these sports projects may be a
financial equivalent of steroids.
So, let us continue. Mr. Tierney, do you have any
questions?
Mr. Tierney. No, I have no questions, Mr. Chairman. I thank
the witnesses for testifying and yield back.
Mr. Kucinich. I thank Mr. Tierney.
We will all thank the witnesses for their appearances. You
are now excused, and we will call the second panel forward
consisting of Brad Humphreys and Dennis Zimmerman.
[Witnesses sworn.]
Mr. Kucinich. Let the record show that the witnesses
answered in the affirmative.
Dr. Brad Humphreys is an economist who teaches at the
University of Illinois, Urbana-Champaign. His research
interests in sports economics include the economic impact of
professional sports on urban economics. His most recent
research on the economic impact of professional sports teams is
entitled, ``Caught Stealing: Debunking the Economic Case for
D.C. Baseball,'' and this was published by the Cato Institute.
Mr. Dennis Zimmerman is the director of projects at the
American Tax Policy Institute. The American Tax Policy
Institute's primary purpose is to promote and facilitate non-
partisan scholarly research analysis and discussion of U.S.
Federal, State and local tax policy issues. Formerly, Mr.
Zimmerman was an analyst with the CRS for 21 years and with the
CBO, Congressional Budget Office, for 7 years.
Mr. Zimmerman's published work includes, ``Private Use of
Tax-Exempt Bonds: Controlling Public Subsidy of Private
Activity.''
I want to thank the gentlemen for being here.
Mr. Humphreys, you may proceed with your testimony.
I would ask the witnesses to limit your testimony to 5
minutes. Anything that is not spoken will, of course, be
included in the complete record of the committee. Thank you.
STATEMENTS OF DR. BRAD HUMPHREYS, ECONOMIST, UNIVERSITY OF
ILLINOIS, URBANA-CHAMPAIGN, CHAMPAIGN, IL; AND DENNIS
ZIMMERMAN, DIRECTOR OF PROJECTS, AMERICAN TAX POLICY INSTITUTE,
FALLS CHURCH, VA
STATEMENT OF DR. BRAD HUMPHREYS
Mr. Humphreys. Thank you very much for the opportunity to
testify here, Chairman Kucinich and other committee members.
I am an economist who does research on the economic impact
of professional sports teams and facilities on the local
economy. I have, in my own research, gone back and looked at
the economic performance of every city in the United States
that had a professional football, basketball or baseball
franchise from 1970 until the present, looking for evidence
that professional sports are somehow engines of economic
development in cities, and I have not found any evidence
whatsoever suggesting that professional sports stadiums create
jobs, raise income or raise local tax revenues.
There is no doubt in my mind that professional sports
stadiums concentrate economic activity in the area approximate
to those facilities, but we need to look at the entire economy
of cities and not just what is going on within 2 miles of a
professional sports stadium. When we look at the entire cities'
economies, there is just no evidence supporting the idea that
professional sports facilities are engines of economic growth.
So, over the last 15 years, we have subsidized construction
only of professional sports facilities by about $15 billion in
inflation adjusted terms.
Why do we continue to subsidize that construction with
Government money? Well, it is undeniable that professional
sports provide some non-economic benefits to communities: a
sense of community, world class city status, these sorts of
things. We hear this all the time, and that is important. It
might be that could justify our subsidies, but I want to point
out that the evidence of economic benefit is just not there.
There is a second reason that we might still continue to
subsidize professional sports facility construction, and that
is the subsidies are the product of a long negotiation between
a number of people: taxpayers, local politicians, the teams,
people like that. We have the Congress, by extending special
anti-trust status to professional sports leagues, has given the
team owners the upper hand in that process. A team owner can
always threaten to leave for another market which is there
because sports leagues have this anti-trust protection that
you, the Congress, have given them.
I urge you to think about and consider carefully whether or
not we should extend this anti-trust protection to sports
leagues so that they can extract these subsidies from local
governments because I think this is a root cause of a lot of
these problems of subsidizing sports facilities that don't
provide economic benefits.
I also want to point out for people who are trying to
decide on these subsidies, that there are two types of evidence
that we have about what the economic impact of professional
sports facilities are. One are these promotional studies or
economic impact studies that are generates by proponents of
these subsidies, and they typically find huge economic
benefits. This other type of evidence that we have is
scholarly, peer-reviewed academic research, the kind that I do.
Often in the court of public opinion, these two types of
evidence are treated equally, and I would argue that is a very
bad public policy idea, to treat them equally.
One of the previous panelists said that we need to have
independent oversight to see if these benefits ever turn up.
That is what peer-reviewed academic research is. It goes
through the peer review process.
We don't make policy about drugs and things like that just
based on what pharmaceutical companies say. We have research
that is peer-reviewed, that tells us about those things. We
should have the same sort of standards when we are considering
whether or not there is economic benefit to be gained from
professional sports.
[The prepared statement of Mr. Humphreys follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Thank you very much, Mr. Humphreys.
Mr. Zimmerman.
STATEMENT OF DENNIS ZIMMERMAN
Mr. Zimmerman. Mr. Chairman, ranking member and members,
thank you for this opportunity to appear before the committee.
I have submitted written testimony for the record.
Professional sports stadiums have been subjected to three
different sets of tax-exempt bond rules since 1968. Until 1968,
most stadiums were financed with tax-exempt industrial
development bonds, with debt service paid primarily from
stadium related revenue even though they also could be financed
with governmental bonds whose debt service was paid by local
taxpayers.
In 1986, stadiums were removed from the list of private
activities that could use industrial development bonds which
the 1986 act renamed private activity bonds. Since local
taxpayers were expected to be reluctant to use general
obligation debt to pay for stadium debt service, stadium bonds
would wither. Unfortunately, that expectation was overwhelmed
by the combination of the monopoly power of professional sports
leagues that maintains excess demand for franchises and stadium
proponents' use of pseudo-economic studies showing that
stadiums pay for themselves.
Then in 2006, the Internal Revenue Service issued a letter
ruling that effectively restores private activity bond
financing of stadiums. It reclassified stadium-related revenue
as general taxes called payments in lieu of taxes, PILOTs,
converting private activity bonds into governmental bonds.
Whether the PILOT ruling is good or bad policy depends on
the policy goal one is trying to achieve. If the goal is to
eliminate Federal subsidy of professional sports stadiums, it
is poor policy. Local taxpayer resistance to publicly financed
stadiums is reduced because PILOTs substitute stadium-related
revenue for general taxes paid by local taxpayers.
Even worse, renaming business-related revenue as PILOTs
might open the door for widespread tax-exempt governmental bond
financing of private investment projects not currently eligible
for private activity bond financing. It invites local elected
officials to become commercial bankers.
Senator Daniel Moynihan tried to eliminate tax-exempt
stadium financing more directly in 1996 with the Stop Tax-
Exempt Arena Debt Issuance Act [STADIA]. If the 10 percent
security interest test for stadiums is eliminated, in other
words, wiped off the books, professional sports stadiums would
always be classified as taxable private activity bonds because
they use more than 10 percent of the bond proceeds. Such a
prohibition is also good economic policy because the Federal
taxpayer receives no benefit from a bond-financed stadium.
The budget's effect on jobs and tax revenue is determined
by the budget resolution. What that money is spent on makes
little difference unless it is for a spending program that
reduces the natural rate of unemployment such as job training.
These taxes and bonds do not accomplish that objective.
In contrast to eliminating the Federal subsidy, one's
objective might be to implement the benefit principle of
taxation that requires those who receive the benefit to pay its
cost. PILOTs might be beneficial. PILOTs would allow stadium-
related revenue to be used to be pay debt service and would
reduce the pressure to finance stadiums with general revenue.
Stadium-related revenue is generally paid by those receiving
direct benefits from the stadiums where as general taxes such
as income, property and sales taxes are poorly related to
stadium usage and receipt of benefits. The costs and benefits
of the dominant political coalition that promotes the stadium
would be better balanced, thereby rationalizing prices and
reducing over-investment.
But the PILOT policy has a problem. As mentioned above, it
might lead to a significant conversion of taxable private
activity bonds and to tax-exempt Government bonds, therefore
increasing revenue loss.
A three step compromise is available that could advance
both policy objectives.
First, add stadiums to the list of private activities
eligible for tax-exempt financing. That would encourage local
governments to use the benefit principle of taxation to finance
the stadiums.
Second, subject stadium bonds to the private activity bond
volume cap. That would require stadium projects to compete for
scarce volume cap with other eligible private activities such
as mortgage revenue bonds and would minimize the Federal
revenue loss.
Third, wipe the PILOT precedent off the books. That would
prevent its indiscriminate application to a broad range of
private activities and control elected officials' role of
commercial banker.
Thank you.
[The prepared statement of Mr. Zimmerman follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. I thank Mr. Zimmerman.
We are going to go to questions in the second, and at the
conclusion of that, we will go to the third panel of the
Internal Revenue Service.
Dennis Zimmerman, you are a former Congressional Research
Service and CBO analyst, is that correct?
Mr. Zimmerman. Correct.
Mr. Kucinich. In your opinion, what is the public purpose
fulfilled by tax-exempt financing of the construction of Yankee
Stadium?
Mr. Zimmerman. Well, if you go by the structure of the bond
rules prior to the PILOT, it would not have been allowed. In
general, since these things provide no Federal benefit, no
benefit to Federal taxpayers, it is not clear why one would
want to subsidize these things.
Mr. Kucinich. So are you saying then that it is
inconsistent with the law's treatment of public financing for
sports stadiums?
Mr. Zimmerman. Yes, prior to the PILOTs act, they would
have been classified as private activity bonds which would have
been taxable.
Mr. Kucinich. Mr. Zimmerman, has the IRS in its rulings for
the Yankees and the Mets adhered to the meaning and intent of
the law?
Mr. Zimmerman. The meaning and intent of the law is sort of
in the eye of the beholder frequently. As I read the law, prior
to the PILOTs ruling, it is not consistent. These would have
been counted as stadium-related revenues, they would have
violated the 10 percent rule, and they would have not have been
eligible for tax-exempt status.
Mr. Kucinich. Now in your testimony, you assert that the
IRS proposed rulemaking, which will be discussed in our next
panel, creates a way around the restriction on tax-exempt
private activity bonds for use in sports stadium construction,
is that right?
Mr. Zimmerman. Correct.
Mr. Kucinich. So, in your opinion, how would you
characterize the impact of the IRS rulemaking on the 1986 law
with respect to public financing of sports stadium
construction?
Mr. Zimmerman. It circumvents what the 1986 tax act rules
say because it reclassifies stadium-related revenue which
clearly should be counted against the 10 percent security
interest test. It reclassified it as generally applicable taxes
and converted these things from private activity bonds which
are taxable into governmental bonds which are tax-exempt.
Mr. Kucinich. I thank Mr. Zimmerman.
Mr. Issa.
Mr. Issa. Thank you, Mr. Chairman.
I would like to followup on each of your opening
statements.
Dr. Humphreys, I am a little confused on one thing. Your
testimony was that this is sort of a zero sum game, that if it
wasn't spent in the downtown area in San Diego, Washington,
Detroit, Chicago, wherever, it would be spent in the suburbs.
Isn't that the nature of redevelopment though? Isn't that what
center city projects do?
I am a Clevelander, the same as the chairman. Isn't it, in
fact, the problem in Cleveland is my brother in Shaker Heights,
he is doing a little better, and by the time you get to
Beechwood, they are doing just fine while Cleveland itself, a
great city, has a constant problem of converting from the river
and lakefront of the steel and coal era into a desirable place?
Why in the world, economically, wouldn't you consider that
shifting from, if you will, the place where there is plenty of
money to the place where there isn't enough money and as a
result not enough money to run the Cleveland City Schools as an
economic benefit and give full credit to that, not saying that
it changes your model in any way except how can you not give
credit for that shift?
Mr. Humphreys. Well, I don't understand why we should spend
hundreds of millions of dollars to subsidize a downtown
business to attract entertainment spending. Why is it that a
business owner somewhere in the suburbs, who is losing
customers, shouldn't be extremely upset at us using public
dollars to subsidize a competitor for him to move that business
elsewhere?
I mean I think that long run economic growth is related to
fundamental factors like worker productivity and education and
things like that.
Mr. Issa. OK, I get it. You like the macro, and I like the
micro. It is tomato-tomato. I guess I have a difference of
opinion, having been to Jacobs Field, having been to the Rock
and Roll Hall of Fame and so on, that it is worth for the
overall benefit of the city not to have a blighted area, crime-
ridden, with kids who don't have enough money to go to school,
but maybe I am wrong on some of these counts.
Mr. Zimmerman, coming over to you.
Mr. Zimmerman. Could I comment on the question?
Mr. Issa. Please, in my limited time, I would love to hear.
Mr. Zimmerman. OK, the one other aspect of this, of the
question is I can see why one can conceive of that as being a
benefit for the local and maybe the State taxpayers. It is not
clear to me why that is a benefit to the Federal taxpayers.
Mr. Issa. No, no. I understand.
Mr. Zimmerman. And therefore why the interest in subsidies.
Mr. Issa. Thank you, and that follows up on what I was
going to ask you.
You have held this opinion since at least 1986 when you
testified before Congress. So this opinion that you gave us
here today is not new. This has been consistent since when you
testified in 1986 when Congress removed stadiums from the list
of activities, and that is good because it is nice once in a
while to have people who don't change their opinions from one
election to another, not that this would happen in this town.
But I have to get back to in your opinion, spreading it
beyond baseball, I figured we would take on apple pie, baseball
and mother. We should shift to a broader arena. Museums or how
about the Cleveland Symphony, should it enjoy any tax benefits
such as the fact that contributions to the symphony are tax-
exempt or tax free? They are donations.
Now that is where rich people go, right, normally to the
symphony and the opera and so on?
Mr. Zimmerman. That is right.
Mr. Issa. Isn't there, in fact, to a certain extent, when
you look at the economic hierarchy, if you are going to take
away stadiums--and I use stadiums as a euphemism for baseball
or football or sports in general--then don't you have to treat
equally by taking away the symphony, the museums, the opera?
Is one culture more valuable to another and isn't your
stand against stadiums, which are necessary if you are going to
have professional baseball, inconsistent unless you are also
calling on elimination of similar treatment for any and all
redevelopments but particularly if they involve the other
alternatives to what people would like to do with maybe less
limited resources?
Mr. Zimmerman. All these things, of course, have some value
in terms of intangible benefits. But, no, I don't think they
are comparable, and they are not comparable because these
stadiums are private, privately owned business operations.----
Mr. Issa. OK, well, I want to followup. I am on a yellow. I
am on a yellow light.
Mr. Zimmerman [continuing]. Whereas museums and cultural
opportunities are non-profit organizations.
Mr. Issa. Well, no. Let me go back again.
What if a city wants to build a stadium and own it like
they build a symphony facility and they build museums and own
them? Now, first of all, a lot of symphonies and museums are
not publicly owned, but notwithstanding that, is your point
public ownership versus private or, in fact, when we build
facilities for other cultural and athletic and other
activities, don't they all fit into the same gambit?
If we are going to take on baseball, motherhood and apple
pie, and I am happy to do it, don't we have to take on all
levels of these kinds of activities?
Mr. Zimmerman. No. Again, I think the distinction is in the
instance where these things are privately owned, then
essentially what is happening is you are providing windfall
gains to the owners. That is the example of the Texas Rangers
stadium. Most of the benefits of the Federal tax subsidy ended
up increasing the capital value and went into the pockets of
the owners whereas whether it is a publicly owned symphony or a
non-profit owned symphony, there are non-distribution
constraints and unless there is corruption present, the value
of these Federal tax benefits are not being absorbed into a
higher rate of return for the private owners.
Mr. Issa. I guess I missed something at the Who concert the
other day, but please, Mr. Chairman.
Mr. Kucinich. The gentleman's time is expired.
I would just like to interject here, and that is that I
appreciate the gentleman's interest in the city of Cleveland,
his home city--we miss you--and that the economy of San Diego
may be a little bit different than the economy of the city of
Cleveland where we have the highest poverty level despite
spending close to $1 billion for these tax supported
facilities.
Mr. Tierney.
Mr. Tierney. Thank you. I was a little amused to listen to
my colleague, Mr. Issa, make a great argument for the
redistribution of wealth from the suburb into the urban area
which was sort of interesting.
Mr. Issa. Would the gentleman join in that with me? You
know we could work on this together. You just have to take on
the big structures everywhere on this.
Mr. Kucinich. You can address your remarks through the
Chair. Continue.
Mr. Tierney. Reclaiming my time, I am glad you made the
distinctions in some of your remarks about the nature of public
policy for non-profit institutions versus those that are going
to get private gain from a tax break on the Federal Government.
Whether or not the city holds the stadium or not, the
individual that is running the ball teams in there is still
going to make a considerable profit because it was built. I
don't know whether that is what we want our public policy to
lean toward.
Can I concentrate back? There are two things I want to do.
I want to talk a little bit about the 10 percent rule. Mr.
Zimmerman, will you explain that to those that might not fully
understand every little bit, every little detail?
Mr. Zimmerman. Right, bonds are taxable or tax-exempt
depending upon two tests. One is whether more than 10 percent
of the bond proceeds are used by a private business, and the
second is whether more than 10 percent of the debt service is
secured by property used in the trade and business.
Mr. Tierney. Either one of those things would exclude you
being able to be exempt?
Mr. Zimmerman. Right, you have to fail. You have to exceed
the 10 percent for both of those. So for a stadium, obviously
more than 10 percent of the bond proceeds are being used by a
private entity.
So the question when they cannot be used with private
activity bonds is can you structure the deal so that no more
than 10 percent of the debt service is paid for by stadium-
related revenue? That is the property being used in the trade
or business.
The 1986 act basically said if you don't satisfy that 10
percent security interest test, then the only way, then you
can't issue a stadium bond. So it would have to essentially be
a governmental bond which forces you to finance it with general
tax revenues.
Mr. Tierney. My question, I guess, would be the IRS
rulemaking letter, was that an interpretation or a change in
law?
Mr. Zimmerman. Well, I am not a lawyer. I can only tell you
what the effect was.
Mr. Tierney. The effect was to do the reverse of what we
thought the statute did.
Mr. Zimmerman. The effect was it converted what, absent the
PILOTs ruling, would have been considered stadium-related
revenue, and----
Mr. Tierney. I don't want to cut into you, but it just
sounds to me like it was created out of thin air.
Mr. Zimmerman [continuing]. Therefore would have classified
it as a taxable private activity bond. It would not have been
eligible for tax-exempt financing.
Mr. Tierney. Thank you.
Would each of you expound a little bit on the monopoly
issue here, how that affects the situation because both of you
mentioned it in the course of your remarks?
What I think is important to note is what about the anti-
trust issue on this, how would that change things? Do you think
it is wise to continue the anti-trust exemptions and how might
we change them and what would be the effect if we did?
Mr. Humphreys. Well, the effect of the anti-trust ruling is
that leagues restrict the number of franchises that there are.
I mean ask Ms. Watson why there is no NFL franchise in Los
Angeles. The reason is that they are operating as a monopoly or
a cartel and they want to keep that market open so that if
another team wants to threaten to move if they don't get a new
stadium built, then they have that option to move. So that is
restriction.
Why are they allowed to do that? Well, because they enjoy
some anti-trust protection.
If that was removed, there would be an NFL franchise in Los
Angeles instantaneously almost because it is clearly going to
support an NFL franchise. So this just gives. As team owners
and local politicians bargain over subsidies, it gives the
owners the ultimate threat and the ultimate power in the
process, and that is how they get the subsidies as I see it. So
I don't know.
Mr. Zimmerman. Effectively, when you have a monopoly, you
maintain excess demand, and it is that excess demand which
creates the need for local governments to compete to get
franchises.
Mr. Tierney. Can either of you make a case?
Mr. Zimmerman. And how do they compete? They compete with
larger and larger subsidies of the capital costs of the
franchises.
Mr. Tierney. Can either of you make a case for continuing
the anti-trust exemptions?
OK, I yield back, Mr. Chairman.
Mr. Kucinich. I thank Mr. Tierney.
Mr. Turner.
Mr. Turner. Thank you. Thank you, Mr. Chairman, for holding
this hearing. I greatly appreciate your look into this issue,
having shared with you the background of having been a former
mayor and having been a mayor at a time when our city undertook
the construction of a Minor League Baseball stadium which had a
huge effect on transforming out downtown.
Mr. Chairman, as you know, so many times because of our
background, we agree upon the issues that are identified but
not necessarily on the specific resolution of those issues.
I want to thank you for panel one because the most
important thing that we have in local government are people who
get involved and who are activists to hold Government
accountable and to look at where their taxpayer funds are going
and what the direction and the vision of the community should
be. It is not always that we will all agree, but if we don't
have people at the table who are willing to dive into the facts
and the details and hold the community accountable for what
they are undertaking, you can get bad deals.
What is interesting in the information that we have today
is clearly there are some bad deals in stadiums--I have seen
them in our State--and there are also some really good deals.
We had a really good deal in our community because we
capped our exposure and liability so the taxpayers had a limit
at the amount that they were investing in the stadium. Cost
overruns were to the team. Management of the construction was
to the team. When we entered into it as a community, we knew
exactly what the subsidy was going to be and what we expected
the result of economic development in the area would also be.
Now, on the second panel, there are a couple of things that
you have said that I find very interesting. One is your
description of a monopoly with respect to anti-trust laws
because what have you just stated is actually what I believe is
backward from the economic model is in monopoly. You say that
we should get rid of the anti-trust exemption because they are
maintaining excess demand and making local governments compete.
Well, the reality is if we took off the anti-trust
exemption, you wouldn't have less stadiums. You would have more
stadiums and more teams and more communities endeavoring to do
it. So it would have the exact reverse impact of what you are
arguing. You would have more communities having access to teams
and seeking to undertake construction of teams for their
communities.
Second, the issue of looking at the stadiums as an amenity
and the statement that has been made of a consensory conclusion
that has emerged from peer-reviewed literature, except for the
fact that the externalities that are not currently qualified
and that appears that residential property values may be higher
in cities with sports teams, but the conclusion starts with
there is a consensus that they are not an engine of economic
growth.
There is a significant amount of peer literature that does
show that the amenities that a community has significantly
impact economic development. Richard Florida, who, as you know,
is the author of The Creative Class, goes into an incredible
analysis. In one article entitled, ``The Economic Geography of
Talent,'' he actually correlates a community's success based
upon their ability to attract a highly educated, highly
skilled, highly qualified, competitive work force to the
amenities in the community and indicates that the success level
of a community is based upon the amenities that are provided
and being able to attract people who have degrees and young
folk.
Interestingly enough, he has a little graph here that says
Coolness Index, and it says Pittsburgh, Seattle, Atlanta,
Denver, San Francisco, Boston, Chicago, Los Angeles, all of
which, I think we could all in this room name their teams.
As an indication, it goes on to say that median housing
values are higher in those communities that have these
amenities where there is a coolness associated with attracting
new talent, an item that Dr. Humphreys, you indicated that it
appears that residential properties values may be higher in
cities with sports teams.
I think it is very important that we distinguish a broad
policy such as do we provide a tax benefit to stadium
construction? Do we provide it, as Mr. Issa said, to other
amenities and activities of a community as a holistic approach
to regional economic development?
It is not suburbs versus urban because the reality is the
stadium is an economic engine for suburbs also. You have no
suburbs that exist without an urban core. It doesn't happen. So
you have to have a regional approach to what are the amenities
you are going to have in a community, how you are going to use
public funds for those, and that is a local government
discussion and a local government distinction.
My question for both of you is to go back to the issue that
Mr. Issa had raised of if you are going to say that stadiums.
Mr. Kucinich. The gentleman's time is expired.
Mr. Turner. Can I finish my question, Mr. Chairman? It is a
quick question.
Mr. Kucinich. I will agree to that, but your time is
expired. Go ahead.
Mr. Turner. Thank you.
If you are going to have a policy where you look at
stadiums only as being subsidized by the taxpayers, don't you
have to put on the board all of the amenities that are used by
other for profits such as rock concerts and other types of
venues that are considered amenities that tend to attract that
type of spirit or life that a city points to for its identity?
Mr. Kucinich. You can make your answers very brief.
Mr. Humphreys. I don't understand the question very well
actually. We should consider? We should consider rock concerts
as amenities and subsidization?
Mr. Turner. You have to have a venue, and certainly you are
not saying that the music community must sustain construction
of its own venue and/or they should not come into a community
and host an event.
Mr. Humphreys. And where does it end? So we have to have
restaurants too. Do we need to subsidize what restaurant
construction and other amenities like that? I mean some of
those things are privately provided goods. If we are talking
about subsidies, why is it that we should, you know, I don't
know where that list of things ends.
Apparently, you are in favor of subsidization of all sorts
of construction projects.
Mr. Turner. My point is should we include them all if we
are going to pick on one?
Mr. Humphreys. No.
Mr. Kucinich. The gentleman's time is expired.
[The prepared statement of Hon. Michael R. Turner follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. I want to thank this panel for their
testimony.
We are going to move to the third panel, the IRS.
Testifying will be Donald Korb, the Chief Counsel of the
Internal Revenue Service.
This is kind of a Cleveland reunion because Mr. Korb is a
former Cleveland area resident, a graduate of Brush High. We
are very proud of your success and your presence here.
But let us move quickly. I would ask, Mr. Korb, if you
would remain standing.
[Witness sworn.]
Mr. Kucinich. Let the record show that the witness
responded in the affirmative.
Mr. Korb, you may proceed.
STATEMENT OF DONALD KORB, CHIEF COUNSEL, INTERNAL REVENUE
SERVICE, WASHINGTON, DC
Mr. Korb. Thank you, Mr. Chairman, Ranking Member Issa,
other members of the subcommittee.
I would suggest we had this hearing in the wrong place. We
probably should have held this hearing in Cleveland, so next
time we get together.
Mr. Kucinich. We may have a followup, but for now we are in
Washington, and we are so happy to have you here.
Mr. Korb. Mr. Chairman, I appreciate the courtesy of
letting me speak now and also the conversation we had the other
day on the timing.
Mr. Kucinich. We understand your time constraints. You may
proceed.
Mr. Korb. I very much appreciate it.
I am the Chief Counsel for the Internal Revenue Service,
and the Chief Counsel is the legal advisor to the Commissioner
of the IRS on all matters pertaining to the interpretation,
administration and enforcement of the tax law.
Before discussing some of the specific issues that are the
focus of this hearing, it is important for me to emphasize that
although the Office of Chief Counsel assists and advises the
IRS in administering our Nation's tax system, neither our
office nor the IRS itself develops proposals on tax policy or
takes a position as part of the legislative process. Questions
on tax policy issues are better addressed to the Secretary of
the Treasury or the Assistant Secretary for Tax Policy in the
Treasury Department.
In the tax policy area, our role is limited to advising on
administrative issues that may arise from proposed tax
legislation.
Now, let me turn to the subject of this hearing. The
Internal Revenue Code provides an exclusion from income for
interest paid on bonds issued by the State and local
governments. Tax-exempt bond financing plays an important role
as a source of financing to State and local governments for
public infrastructure and other significant public projects. In
essence, the interest income exclusion provides a Federal
subsidy to enable State and local governments to obtain low
cost financing for traditional governmental functions such as
schools, roads, libraries and firehouses.
In addition to these types of projects, the Tax Code also
permits State and local governments to use tax-exempt financing
to subsidize certain activities of private businesses. Here
again, the State and local government may have a valid
governmental purpose for providing this subsidy. However, over
time, Congress has put limits on State and local governments
subsidizing private business activities with tax-exempt bonds.
Currently, a bond that subsidizes a private business may
not benefit from the tax-exemption unless the proceeds of the
bond are used for certain specified purposes, and if you look
on page 3 and 4 of my written testimony, you will see the list
there.
As we have discussed this morning, there are two basic
types of tax-exempt bonds, what we call governmental bonds and
what are called private activity bonds. Bonds are classified as
governmental bonds if the proceeds are used to carry out
governmental purposes and the bonds are repaid from
governmental funds. On the other hand, bonds are classified as
private activity bonds if, for example, the bond-financed
facility is to be used entirely by private parties and the debt
service on the bonds is paid from private sources.
The current private activity bond regime was enacted as
part of the tax reform of 1986 as discussed earlier and was
designed to limit the ability of State and local governments to
act as conduit issuers in financing projects for the use and
benefit of private businesses.
Now, prior to the tax reform of 1986, as you know, stadiums
and convention centers were listed as eligible facilities that
could be financed with tax-exempt private activity bonds. In
1986, however, Congress eliminated these projects from the list
and, at the same time, tightened the private activity bond
tests across the board. This means, as discussed this morning,
under current law, bonds that finance stadiums and convention
centers now must be governmental bonds to be tax-exempt.
Consequently, if a State and local government wants to
issue tax-exempt governmental bonds to finance a stadium that a
professional sports team would use, it can do so provided that
the issuer, the State or local government, receives no private
payments from the team or other private parties for use of the
stadium that in the aggregate exceeds generally 10 percent of
the bonds, of the debt service on the bonds.
Therefore, even if the bonds finance a project that is 100
percent used for private business use, that private business
use will not cause the bonds to be private activity bonds so
long as the issuer pays the debt service on the bonds with
either its general governmental funds or generally applicable
taxes, both of which are not treated as private payments.
So now, let us talk about what we mean by the concept of
generally applicable taxes. Congress indicated in the
legislative history of the Tax Reform Act of 1986 that revenues
from generally applicable taxes should not be treated as
private payments for the purpose of the private payments test.
In 1997, the Clinton Treasury Department provided
regulatory guidance on the definition of what are generally
applicable taxes for purposes of these tax-exempt bond
provisions including guidance which treats certain payments in
lieu of taxes [PILOTs], as, in substance, general taxes. These
1997 Treasury regulations were based on longstanding general
Federal income tax principles dating back to the 1970's dealing
with the deductibility of taxes.
Those 1997 regulations generally define generally
applicable taxes as an enforced contribution imposed under the
taxing power that is imposed and collected for the purpose of
raising revenue to be used for a governmental purpose. It must
have a uniform tax rate that is applied equally to everyone in
the same class subject to the tax and which has a generally
applicable manner of determination and collection.
Although taxes must be determined and collected in a
generally applicable manner, the 1997 Treasury regulations
permit certain agreements to be made with respect to those
taxes. An agreement to reduce or limit the amount of taxes
collected to further a bona fide governmental purpose is such a
permissible agreement.
In addition, the 1997 regulations treat PILOTs in the same
manner as generally applicable taxes. Under the 1997
regulations, a PILOT is treated as a generally applicable tax
if the payment is ``commensurate with and not greater than the
amounts imposed by a statute for a tax of general
application.'' For example, if the payment is in lieu of a
property tax on the bond-financed facility, it may not be
greater in any given year than what the actual property tax
would be on the property.
As I previously mentioned, the Tax Reform Act of 1986
eliminated the ability to finance stadiums and convention
centers among other facilities with tax-exempt private activity
bonds. As a result, State and local governments seeking to
finance stadiums must now issue tax-exempt governmental bonds
and must subsidize repayment of those bonds from governmental
sources including the generally applicable taxes. So, in
layman's terms, this means that a State or local government may
only issue tax-exempt governmental bonds to finance a stadium
if it does not require the professional sports team to pay for
the use of the stadium.
Very difficult interpretive issues arise, however, when a
payment purporting to be a generally applicable tax is imposed
in a customized fashion on a private business use that finances
bond-financed property. In these cases, the Office of Chief
Counsel must decide whether a payment is a generally applicable
tax within the exception from the private payments test or
instead is more like a lease or other payment which would be an
impermissible private payment.
This past July, the Office of Chief Counsel issued two
favorable Private Letter Rulings for tax-exempt governmental
bond financings for two stadiums. The facts in these rulings
involved professional teams that were going to use the
stadiums, so the private business use was met. The question
presented in the rulings was whether the payments to be made by
the teams and to be used for the debt service on the bonds
would constitute PILOTs treated as generally applicable taxes
or instead would be treated as private payments.
Although we had serious concerns about whether the PILOTs
in those two rulings sufficiently resembled generally
applicable taxes, we nevertheless concluded that the 1997
Clinton Treasury Department regulations led to a favorable
response to the taxpayer. Basically, we felt the 1997 Treasury
regulations compelled the result.
But, more importantly, the two Private Letter Rulings
served to focus our attention on how broadly the 1997 Treasury
regulations could be interpreted to permit PILOTs to be used to
pay debt service on tax-exempt bonds in situation where PILOTs
did not bear an insufficient link to an otherwise generally
applicable tax.
To address these concerns, we promptly published proposed
regulations to provide new rules explaining when PILOTs would
be considered to be commensurate with generally applicable
taxes. The basic purpose of these proposed regulations was to
tighten the standards for PILOTs as generally applicable taxes
to assure a closer relationship between the eligible PILOT
payments and the generally applicable taxes. In other words, we
spotted a flaw in the 1997 Treasury regulations, and we moved
expeditiously to fix it.
I want to thank you for the opportunity to appear this
morning and try to clear up the mis-impression and confusion
that sounds like it has surrounded this issue. Thank you, Mr.
Chairman.
Mr. Kucinich. I want to thank Mr. Korb. Of course, because
of the complexity of this, we have given you close to 10
minutes to testify.
Mr. Korb. And I appreciate that.
Mr. Kucinich. You are welcome.
When we come back, we will go to rounds of questions,
without objection, of 10 minutes each so each member of the
panel here will have the opportunity to indulge in that
complexity as well.
[The prepared statement of Mr. Korb follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. This committee will be in recess for 10
minutes, and then we will return. Thank you.
[Recess.]
Mr. Kucinich. The committee will come to order.
Just an announcement and that is that the full committee
will require the use of this room, and we will therefore go
into recess at a quarter after 1. We will come back in at 3.
This is something that in the flow of business here, we have to
go with the flow.
So, again, a quarter after 1, we recess; at 3, we come back
to this room. I appreciate the cooperation of all the
witnesses, and I ask that all the witnesses be back here at 3
including the IRS.
I am going to question Donald Korb, without objection.
Mr. Issa. Mr. Chairman, a point of inquiry, the IRS is
going to have to leave around 1:15. At least, Mr. Korb will.
When you said IRS, you mean back-up personnel?
You have to leave right after this?
Mr. Korb. Unfortunately, I have a meeting that was
scheduled beginning at 1. I have sent a message back now to
move it backward. I will do whatever you want, but it will be a
problem for me.
Mr. Issa. Mr. Chairman, if we do 10 minutes a side, would
that be sufficient to conclude with this witness and then pick
up the new panel at 3?
Mr. Kucinich. No, it would not.
Mr. Issa. OK.
Mr. Kucinich. I think it is important that the gentleman
remain, and I think as we get into the questions, you will
understand why it is important from your perspective. I think
you will want to stay.
Mr. Korb. OK, whatever you want.
Mr. Kucinich. I appreciate the gentleman's cooperation.
I would like to first turn to the subject of Private Letter
Rulings for the New York Yankees and Mets. The regulations
existing at the time in 2006 were very specific, that payments
in lieu of taxes [PILOTs], ``made in consideration for the use
of property financed with tax-exempt bonds '' were ``special
charges.'' Special charges are not equivalent to generally
applicable taxes.
The Yankees wanted to make these payments in lieu of taxes
for the use of property, the new Yankee Stadium, which would be
financed with tax-exempt bonds. As such, in the case of the
Yankees deal, were the Yankees right to be concerned with tax-
exempt financing of their stadium?
Were they concerned that the tax-exempt financing of their
stadium would not be allowed, Mr. Korb?
Mr. Korb. Excuse me?
Mr. Kucinich. Were the Yankees right to be concerned that
the tax-exempt financing of their new stadium would not be
allowed?
Mr. Korb. Well, the Yankees--remember, I didn't personally
work on the ruling. If you use generally applicable taxes, as I
testified, right, governmental funds, under the law that was
passed in 1986, the Yankees, the city--the city owns the
stadium, I think--could use governmental bonds.
Mr. Kucinich. If the IRS had not granted the Private Letter
Ruling, then would the Yankees and the city of New York have
been compelled to do things significantly differently? Their
bonds would have to be private activity bonds, isn't that
right?
Mr. Korb. Mr. Chairman, you are absolutely right, and that
is why we moved very quickly to eliminate the loophole created
in 1987. That is exact. You are exactly right.
Mr. Kucinich. So if taxable bonds would have been used,
what would that of done to the cost of building the new
stadium?
Mr. Korb. They could have used taxable bonds--you are
right--and I assume the interest. I am not a municipal bond
expert, but I assume the interest would have been higher, yes.
Mr. Kucinich. But let us review what this Private Letter
Ruling did. One, it allowed the Yankee Stadium project to avoid
issuing taxable bonds and, two, it entitled the Yankees to a
reduced interest rate for construction of a stadium and thereby
reduced the cost to the Yankees for building a new stadium,
isn't that right?
Mr. Korb. Yes. We were following the law as it was written
in the regulations that were enacted in 1997. We feel compelled
to follow the rules, and that is why we moved to change them.
Mr. Kucinich. Is it logical that the Yankees wanted to use
tax-exempt bonds to retain a greater share of the profits for
Yankee ownership and that the Private Letter Ruling enables the
Yankee ownership to keep a greater share of the revenues which
the Yankees will earn in the new stadium?
Mr. Korb. Well, you know, I am really not an expert on
baseball law, so I can't answer that question.
Mr. Kucinich. In other cases, as our previous witnesses
have testified, building a new stadium increased the value of a
team franchise. What does the building of a new stadium do to
the value of the Yankees and would this not make the owner in a
more profitable condition?
Mr. Korb. Again, Mr. Chairman, I am not a baseball
economist. I am just a tax lawyer, so I don't really feel
qualified to answer that question.
Mr. Kucinich. OK, fine. Well, let us go back to the Private
Letter Ruling which you issued for the Yankees.
Mr. Korb. Yes.
Mr. Kucinich. Can you tell the committee the circumstances
in which you came to learn about the facts of this case?
Mr. Korb. Well, let us be a little careful here. You will
notice.
Mr. Kucinich. Excuse me?
Mr. Korb. No. I am just going to say I have to be a little
careful with the answers I give here because I am constrained
by the law. I don't want to be carted off and go to jail here.
There is a code section called 6103.
Mr. Kucinich. Well, you are under oath.
Mr. Korb. I understand. I understand.
Mr. Kucinich. OK, continue.
Mr. Korb. But I am trying to explain to you. There is a
code section called 6103 which prevents me from discussing
specific taxpayer matters. So I have to be very careful. You
would not want me to go out on the street and talk about your
tax affairs with somebody out there. That is why that law
exists.
So I will have to be, you will have to bear with me. In
other words, I can't acknowledge that it is the Yankees.
So if you could restate the question and let me try to
answer with those legal restrictions in mind.
Mr. Kucinich. Can you tell this committee if the parties in
the case met with you or your staff at the IRS?
Mr. Korb. No one met with me. I do not know about the
staff.
Mr. Kucinich. Can you tell whether or not? Do you have
anybody here from staff to say if there was a meeting?
Mr. Korb. No, but we could answer questions for the record
on those kind of details.
Mr. Kucinich. Do you know if any certain representations
were made by the Yankees in regards to this?
Mr. Korb. Well, again, well, the way the Private Letter
Ruling process works, it is not an examination, OK. The way it
works is somebody comes in with a transaction and tries to get,
wants to get the IRS to approve it before it is done, OK. You
don't send out revenue agents to check out the facts. What you
rely on are the representations under oath, under penalties of
perjury, by the taxpayers.
So I am sure in this case there were representations made
that then our lawyers relied on in giving the Private Letter
Rulings. That is the way it is done.
Mr. Kucinich. Is this a form of lobbying?
Mr. Korb. No, no, no. This is, no.
Mr. Kucinich. I mean there is no lobbying of the IRS going
on?
Mr. Korb. No.
Mr. Kucinich. No one lobbied you?
Mr. Korb. No. This is the way the process works.
Mr. Kucinich. Since the parties felt that they needed a
Private Letter Ruling, they obviously felt they were doing
something that was, in some sense, unprecedented, isn't that
right?
Mr. Korb. No, that is not true at all. A lot of people come
in on very routine transactions. It is just when you do a major
transaction, you want to make sure that you have crossed all
the Ts and dotted all the Is. So it is very, very common for
even in the most mundane to fix a problem for us. Because of
our limited budget resources, we often times try to figure out
ways where people want to come in.
Also, keep in mind, the issuer submits a ruling request for
the bonds. It is not private party. So, in other words, it
would have been the issuer of the bonds that actually came in
for the ruling.
Mr. Kucinich. But they were trying to enable a private
revenue source to pay debt service on governmental bond in
excess of the legal limits, isn't that right?
Mr. Korb. That is exactly why we moved to close, to change
the regulation.
Mr. Kucinich. So, in your mind, weren't they asking for
special treatment from you and you gave them that special
treatment?
Mr. Korb. No, no, that is not true at all.
I took an oath of office when I came here, and everyone who
works for me did the same thing, but we swear to follow the
laws, OK, and the laws are the statutes that you guys pass, the
regulations. The fact is when you come into office, you are
bound by the regulations of your predecessors, and we were just
fortunate, to be honest with you, that this came up so we could
correct the regs.
Mr. Kucinich. Could you tell us what is the connection
between the Private Letter Rulings the IRS did for the Yankees
and the city of New York in July 2006, and this proposed
rulemaking that you spoke of published in October?
Mr. Korb. Oh yes, yes, yes. The timing is they came in, the
issuer. Remember, I can't talk about specific taxpayers, but
the issuer came in and sought a Private Letter Ruling on the
bonds. We, our lawyers dealt with that, felt compelled by the
regulations that had been enacted in 1997 to give the ruling.
We immediately decided that we had to take a look at that
and try to fix it, and so we did. We put out proposed
regulations that deal with the problem that you are talking
about here.
Mr. Kucinich. Mr. Korb, it was the testimony of Mr. Dennis
Zimmerman that IRS Private Letter Rulings for the Yankees and
the Mets and its proposed rulemaking pertaining to PILOTs
violate the intent of the 1986 Tax Reform Act. Now, Mr.
Zimmerman has some authority in this area. He is the author of
numerous studies and articles, even a book on tax-exempt
financing including a legislative history.
What I want to know for the record is that is your
testimony today that your Private Letter Rulings for the
Yankees and the Mets and the subsequent proposed rulemaking are
consistent with the prohibition on tax-exempt financing for
sports stadiums?
Mr. Korb. We felt at the time we issued this ruling, based
on the regulations that were left behind by the last
administration, that we had to issue this ruling. We moved
expeditiously to change that result.
Mr. Tierney. Would the gentleman yield?
Mr. Kucinich. Yes, I will yield.
Mr. Tierney. I am not going to be able to stay around much
longer, but I would like one clarification if I could, sir.
It seems that the issue that we might have a question about
would be the regulation that came out in 1997 or the
interpretation of that.
Mr. Korb. You are right.
Mr. Tierney. I know from your testimony that came during
the Clinton administration because I heard you say it 74 times,
and I thought that was interesting because I don't really care
if it came under the Eisenhower administration and I suspect
that nobody up here does.
So that is where I think we want to focus. That regulatory
issue right there, you felt or your people felt it required
them to come to the conclusion that was reached.
Mr. Korb. We felt compelled. We felt our hands were tied.
Mr. Tierney. Can I just ask in your legal interpretation,
was there any prospect that there was room for interpretation
of that regulation?
Mr. Korb. We wouldn't be sitting here today. We felt
constrained.
Mr. Tierney. OK.
Mr. Kucinich. Reclaiming my time, Mr. Korb, the committee
has received a memo this morning from the Congressional
Research Service on the public purpose of sports stadiums for
purpose of the private activity bond security test. I would
like to direct committee staff to distribute the memo to the
members of this committee and give a copy of the memo to Mr.
Korb and his staff.
As they are distributing it, I would like to read from this
memo, Mr. Korb, starting on page 3: ``To satisfy part (ii), the
requirement that PILOTs are designated for public purpose, the
PLRs''--which you issued for the Yankees and the Mets--``rely
on the stated purpose that the payments are for `economic
development and recreational opportunities in the City' that
would be generated by using these PILOTs to retire the bonds
used to build professional sports stadiums.''
``Aside from the extensive academic literature maintaining
that stadiums do not generate economic development, commentors
might challenge the implicit expansion of `public purpose' to
include not only the facility itself but any activity
indirectly associated with the facility. An argument might be
made that the conclusions in the PLRs are at odds with the
intent of Congress to rein in the expanding use of tax-exempt
bonds for private activities.''
``Enacted tax-exempt bond legislation culminating in the
1986 Act, have sought to curb the use of federally subsidized
public debt for what would otherwise be considered private
activity.''
Now, let me remind you, Mr. Korb, that building sports
stadiums was specifically removed from the list of eligible
activities.
A little bit further on page 3, CRS makes the additional
point that taxpayer bond financing for sports stadiums and
private parking garages to serve those sports stadiums
represent what economists call an opportunity cost meaning that
the money could have been used for alternative purposes that
are of greater public benefit.
What this says is ``The inefficient allocation of capital
contention arises from the economic finding that additional
investment in tax-favored private activities''--I might add,
such as building a sports stadium and parking garages--``will
necessarily come from investment in other public projects. For
example, if bonds issued for mass commuting facilities did not
receive special tax treatment, the bond funds could be used for
other government projects such as schools or other public
infrastructure.''
Mr. Korb, I think that this memo raises questions as to
whether the IRS complied with the intent of the 1986 Tax Reform
Act in awarding tax-exempt bonds for sports stadium
construction and whether the IRS has, through this decision,
frustrated other public purposes from being achieved, namely
school construction and other public infrastructure.
Mr. Korb. Is that a question?
Mr. Kucinich. Yes. Do you have any comment?
Mr. Korb. Oh, the comment would be that I don't see the
regulations cited in here in what you just read.
There was a very interesting question, I think Congressman
Tierney asked that I thought was very perceptive. Is this an
interpretation of the law or is it the law itself? That goes to
what the chairman, you, just talked about. There could be
varying interpretations.
Our lawyers who are well meaning, public spirited people,
who serve us at a great personal sacrifice in terms of
compensation, reached that conclusion, OK.
Mr. Kucinich. My time is expired. I am going to go to the
gentlemen.
Mr. Issa.
Mr. Issa. I am going to pick right up on the same subject.
I think it is a good one.
Private Letters are simply insurance policies that your
interpretation and their interpretation is the same thing? Is
that roughly right?
Mr. Korb. Yes, because it avoids a controversy later on
down the road.
Mr. Issa. Right. It is only different in that it is a legal
opinion from a Government agency rather than your accountants
or lawyers telling you this is OK but then saying we can't
guarantee the IRS. This brings the IRS in.
Mr. Korb. That is right.
Mr. Issa. When you are dealing with hundreds of millions of
dollars of the people's money in the case of New York City,
this is prudent on both sides, right?
Mr. Korb. Yes.
Mr. Issa. Who owns, who will own the new New York Yankee
Stadium when it is completed?
Mr. Korb. You know, I don't know if I answered. The city of
New York will.
Mr. Issa. OK, the city of New York is going to sell off
their old stadium. They are buying a new stadium. You
inherited, from a combination of Reagan and Clinton, a rather
bizarre set of laws that says if you pay for the whole thing
out of the city's coffers, it is OK. It is only if you want to
collect revenue from that entity, that it is a problem because
of this 10 percent rule.
The fact is they could build a stadium; collect nothing and
just let somebody play in it--one day, a Minor League team; 1
day, a high school team; and the next day, the New York
Yankees--and they could pay for everything and it would be OK
under Federal law, right?
Mr. Korb. That is exact. That is exactly what they did in
1986.
Mr. Issa. So, in 1986, and I always think of President
Reagan fondly because he lowered taxes but did revenue
enhancement. This law was intended to be a revenue enhancement.
It tended to tighten up a little bit.
Mr. Korb. The 1986 law took a series of project off the
list. You are exactly right.
Mr. Issa. Revenue enhancement; now, without a new act of
Congress, in 1997, the Clinton administration, and this is a
partisan body so I will use it more freely than you would. The
Clinton administration, which had done the largest tax increase
in American history, passed through a ruling which I understand
had public hearings. They passed something that loosened this
or at least created the opportunity for smart lawyers and
accountants to take advantage of this loosening, is that
correct, roughly?
Mr. Korb. Well, you are right. It is an interesting story
because in 1994 when the regulation was proposed is very
similar to now what we are proposing to do. So, in other words,
it was originally proposed as a tough rule. For whatever
reason, in 1997, they made it a lenient rule, and now we are
trying to bring it back where we believe it belongs.
Mr. Issa. Mistakes get made, and I appreciate the fact that
you have acted quickly when you discovered it.
But I want to go back because the chairman's effort here,
rightfully so, is we are looking at cities, decaying cities,
problems in getting people to cities and the wealth and
education and capability of cities.
Let me run through some quick questions for you, and I
realize that you are not the economist that we had up here
earlier, but the fact is that if that stadium had been built
with post-tax rather than pre-tax money, so to speak, it would
have cost more to do. The city would have ended up with a
higher total cost if they chose to build it anyway.
Mr. Korb. Well, again, I am not a sports economist or a
municipal bond expert, but I think I did respond to a question
from the chairman that probably would be true.
Mr. Issa. Right, so the city who is the owner----
Mr. Korb. Right.
Mr. Issa [continuing]. Ultimately takes advantage of a
lower cost of ownership on the replacement for a stadium which
was built before anyone on the days was born. Babe Ruth may
have built it, but he built it a long time ago.
OK, so this is a loophole somewhat created in 1997, not
intentionally perhaps but created that in your rulemaking, you
are trying to close it again, but the bottom line is it did
save the city of New York money. It serves that purpose.
We can all have an argument about whether baseball or
museums or anything else are good, but the law as it was
written in 1986 and not changed in 1997 allows cities to do
something like the Big Dig. You can spend as much money as you
want, and if you are just using general revenue, you can keep
spending until you run out of money, and it is all bond tax
deductible, right?
Mr. Korb. That is exactly right.
Mr. Issa. We are trying to understand the flaws in the
system, and that seems to be one of the flaws, that if it is a
revenue bond, as we used to know them, then it is limited in
its tax deduction, but if it is going to just be the Big Dig,
so to speak, it is OK.
Mr. Kucinich. Excuse me, Mr. Issa. I apologize for
interrupting you. I have just been notified by the chairman of
the committee that they are requesting the use of this room
now.
Mr. Issa. Our rent is not paid in full yet.
Mr. Kucinich. I don't know. We probably would have
benefited from a tax-exempt approach, but I will stay this.
Mr. Issa. Wouldn't we all?
Mr. Kucinich. Excuse me, Mr. Korb.
So what I would like to do is to continue at 3 with your
questioning and to provide you with an additional minute for
this exchange here.
Mr. Issa. Thank you, Mr. Chairman.
Mr. Kucinich. This committee is in recess until 3, and
thank you very much.
[Recess.]
Mr. Kucinich. The committee will come to order.
Before we begin, I want to thank all the witnesses who have
been very patient with their time. The Congress is in kind of a
wind-up session here before break, so it is required that we go
to the floor for votes.
Now that we are back here, we have had some intervening
matters that I want to call to the attention of the committee,
and I am going to ask Mr. Korb if he would be so patient as to
indulge us one more time.
At the request of Mr. Turner, we ask unanimous consent that
Mr. Murphy be permitted to speak out of order for a period of 5
minutes and 5 minutes only, at which time we would revert
immediately back to Mr. Korb. If I have the concurrence of the
members of the committee, then at Mr. Turner's request we will
proceed.
Mr. Korb, thank you for your patience.
Mr. Murphy, if you would like to come forward? I would ask
you to be sworn.
[Witness sworn.]
Mr. Kucinich. Let the record show that the witness has
answered in the affirmative.
I would ask, Mr. Turner, do you want to introduce Mr.
Murphy briefly?
Mr. Turner. Mr. Chairman, I greatly appreciate that.
Mr. Kucinich. He could go into this 5 minute testimony.
Mr. Turner. Thank you.
Mr. Murphy has a plane to catch, and that is why I
appreciate the chairman's accommodation here.
As the chairman is aware, in Dayton where I was mayor, we
built a Minor League Baseball stadium. Mandalay Entertainment,
of which Bob is the president for the Dayton Dragons, has been
a great experience for us. We know certainly some communities
have had difficulty. We have had a good experience, and Bob is
going to tell us something about that experience and what we
have seen in our community from the transaction that we put
together which was a regional package.
So, with that, it is my privilege to introduce Mr. Murphy.
Mr. Kucinich. Thank you very much, Mr. Turner.
Mr. Murphy, you may proceed, and it would be very important
for you to draw that mic a little bit closer so we can hear
you.
STATEMENT OF BOB MURPHY, PRESIDENT, DAYTON DRAGONS, DAYTON, OH
Mr. Murphy. Thank you very much.
Thank you very much for this opportunity to be here today
to share with you the story about a partnership that has been
and continues to be an amazing success. This partnership exists
between a Single A baseball team, the Dayton Dragons, and the
city of Dayton. This amazing success story demonstrates that a
city with the proper tools and an engaged partner and with the
right economic deal can create something that can not only be a
benefit to a community. It can be a force that can change the
community forever.
Our Congressman, Mike Turner, was mayor at the time and was
very involved in this entire project.
In 1998-1999, the city of Dayton was at a crossroads. The
city was in decline. There was an overwhelming public
perception that downtown was dead and that the hub of the
region was no longer a viable city. The prevailing opinion of
the entire region was that people would not come downtown and,
in fact, had not been downtown for 20 years and that there was
nothing that would get them to do so.
People believed crime was everywhere. Streets were
impossible to navigate. Parking was an impossible situation.
That was the view of downtown. That view got worse when you
looked to the future site of Fifth Third Field, the home of the
Dayton Dragons--deserted lots, deserted buildings, knocked down
factories, graffiti and garbage everyone. It was a classic
brownfield situation.
The city made a decision to fight. They believed that Minor
League Baseball would make a difference. They also believed
that Mandalay Sports Entertainment was the partner that they
needed to succeed.
The city of Dayton under the leadership of then Mayor Mike
Turner and Mandalay Sports Entertainment reached an agreement
that the cost to the city for this project would be capped.
There would be no risk for the city on construction costs.
Mandalay would contribute $4 million to the project. Mandalay
would also capitalized the stadium to a minimum of $1.5
million, having an equity stake of $5.5 million.
Mandalay would assume all construction cost overruns.
Mandalay would be responsible for repair and maintenance and
utilities for the entire 20 year term of this agreement. In
summary, the city would make a known investment with no risk of
exceeding the agreed upon level of investment.
What has the city of Dayton accomplished? The Dayton
Dragons have created jobs in the city of Dayton. Other
companies benefit economically from Dayton baseball including
cleaning companies, electrical companies, transportation
companies, hotels, printing companies, office suppliers, food
suppliers and a whole host of others. Since 2001, the number of
market rate housing units almost doubled from 485 units to 929.
Dayton baseball has had the intended impact of being a
stimulant for economic development in and around the area.
Bars, restaurants, markets and building renovations have all
occurred. WorkflowOne, a $1 billion company with 500 employees,
located its headquarters adjacent to the baseball stadium due
to the excitement of Dayton baseball. The CareSource Management
Group is building a $55 million office building near the
stadium. The city of Dayton is moving forward on Tech Town, a
$25 million project created in the early stages of the baseball
project to target technology companies.
Other amenities have been successful due to the changed
perception of downtown including the $120 million Schuster
Performing Arts Center and the $32 million recreational
development along the Miami River known as RiverScape. Each
year, more than 500,000 come to downtown to enjoy the Dayton
Dragons, also enjoying downtown's offerings of restaurants and
entertainment options.
Buildings have been renovated to include apartments, condos
and loft living. Additional condos are being planned in and
around the stadium. Minor League Baseball attracts fans
throughout the region, helping to dispel those negative
perceptions of downtown. Now, the Ballpark District, a $230
million major mixed use development is being proposed around
Fifth Third Field, capitalizing on the success of baseball.
What have the Dayton Dragons accomplished? They have set
the all-time Single A attendance record on three occasions.
They have averaged over 580,000 fans each year. They have sold
every single seat before the season's first pitch for 8
consecutive years. That has never been done in over 100 years
of Minor League Baseball history once. They have a sellout
streak totaling 496 games which will grow to 566 games this
year, our eighth season.
Dayton has been in the top 10 in attendance in all classes
of Minor League Baseball which includes 160 teams. Fifth Third
Field has been selected as one of the top 10 ballparks, and the
team has received sports industry awards recognizing the
franchise as the best in minor league sports.
So did the city achieve its goal? Did the team achieve its
goal? The answer to both of these questions is yes.
Baseball has an effect on people too. Non-profit
organizations work at the stadium and have raised well over $2
million for youth organizations. The Dragon's Hometown Heroes
Program is designed to thank and take care of families of
deployed personnel at the Wright Patterson Air Force Base.
Also, the Dragons have introduced a program known as the
Dragons MVP Program, a tool for teachers. This program is an
incentive and award system for fourth and fifth graders. This
program will be in 850 classrooms and will impact 25,000
students in our area.
Just finally, if I may, the city of Dayton and the Dayton
Dragons are proud of what has been accomplished and believe
that the proper foundation has been built for future growth,
economic development and have truly created a city that has the
quality of life that will allow the city to compete for people,
companies and economically well into the future.
Thank you very much, Mr. Chairman.
Mr. Kucinich. I thank the gentleman. By agreement, the
gentleman is free to go right now, and we are going to move on
to Mr. Issa's 6 minutes of questioning of Mr. Korb.
I want to thank the gentleman for traveling here from
Dayton and thank Mr. Turner for making sure his testimony was
available.
Thank you, Mr. Turner.
Mr. Turner. Mr. Chairman, I greatly appreciate your
allowing him to testify.
Mr. Kucinich. Absolutely.
We will continue with Mr. Korb's testimony. Again, Mr.
Korb, thank you very much for your generous agreement to remain
here so that you can answer the questions. Also, we will look
forward to joining our next panel momentarily.
Mr. Issa, please proceed.
Mr. Issa. Thank you.
Mr. Korb. Yes, I do want to extend my appreciation to you
for permitting me to testify.
Mr. Kucinich. Thank you very much, Mr. Korb.
OK, Mr. Issa.
Mr. Issa. Thank you, Mr. Chairman.
Can we put up the paragraph from the memo we were handed
earlier today? Is that as large as it can be?
Mr. Korb, do you have a copy of this memo? Were you given
it?
Mr. Korb. Yes, I do.
Mr. Issa. My understanding, having read it, is that on the
first page, the major paragraph which is actually the third
paragraph makes it clear, as I see it, that in fact what you
did was consistent with the public law and the precedent, and
that is really what this says, notwithstanding page 3. Have you
had a chance to read that?
Mr. Korb. Yes, I agree with you.
Mr. Issa. That is good that CRS, current CRS agrees that
notwithstanding what might be right or wrong in a given city,
that you made the ruling that was the only ruling you could
make under the current IRS, non-changed.
Let me go back through just one more thing because I want
to understand. You have really done your work to be an expert
on the history of this, but I want us to understand it too. In
1971, the revenue ruling made it clear, if I understand, that
the PILOTs were considered general revenue.
Mr. Korb. Yes, I alluded to that in my opening statement.
Mr. Issa. The bottom line is if you do a PILOT right, under
current law, you are turning private money through this process
into general revenue just like it was anything, and when it is
spent, it is spent under the current congressional guidance to
you and IRS rulings. You are turning it into general ruling for
the city as though the city paid the whole thing directly.
Mr. Korb. That is exactly right.
Mr. Issa. It may be a loophole, but 1971 makes it a pretty
old loophole.
More importantly, not only is this specific and allowed,
but it appears as though in 1986 when the House and the Senate
each passed competing versions of the legislation that, in
fact, governs today, that the House saw much closer to what Mr.
Kucinich's first witnesses said, the majority witnesses said.
They passed and said you shouldn't be able to have stadiums
financed with these revenues, period, while the Senate allowed
for the continuation of what you are faced with today. Is that
your understanding?
Mr. Korb. Yes. It is interesting; the last time I served,
did public service with the IRS was 20 years ago, and I
actually worked on the 1986 Tax Reform Act as the Assistant to
the Commissioner, and you are exactly right.
Mr. Issa. Faced with our decision from the House in 1986,
our decision appears to be similar today, but it wasn't what
prevailed in conference.
When it comes to changing what you can change which you
have now noticed, do you believe that you should be successful
in at least going back to a pre-1997 standard?
Mr. Korb. Yes, as I said earlier, the proposed reg in 1994
is very similar to what the standard we used in our proposed
regulation.
Mr. Issa. If this body wants to explicitly stop the
financing of stadiums, not stadiums and other things like it,
museums, etc., but specifically stadiums, will we have to give
you new legislation in order for you to explicitly stop that?
Mr. Korb. Oh, absolutely, yes.
Mr. Issa. OK, well, that is what I wanted to achieve more
than anything else is an understanding of your hands are tied
as I understand. Beyond what you are trying to do through
rulemaking, your hands are tied unless both the House and the
Senate this time agree on a change, and that change would have
to name stadiums in some way that would make them different
than other public service entities that have a public-private
performance.
Mr. Korb. Yes, that is right.
Mr. Issa. I guess we have been unfair with our time in many
ways for you. Are there things that we should know beyond that
here today, things that you think we haven't made clear in
understanding what your limits are and how you have to treat
these and equities that maybe we could change that exist in the
law?
Mr. Korb. Again, remember, we administer the Tax Law at the
Internal Revenue Service. We do not establish the policy. That
is up to the Treasury Department to recommend changes and for
you all to enact that.
As you just said, the law is very clear that if a city or
State wants to use governmental funds, it is perfectly free to
do so under the law, and we are obligated in following the law
when we act. We found this flaw in the regulation. We moved
quickly to correct it. We cannot go any further than that.
Mr. Issa. OK.
Mr. Korb. At this point forward, that is all we can do.
Mr. Issa. Good. I know you are not going to be able to give
us an exact number, but when we talk about all the stadiums and
ballpark expenses as a percentage of the moneys which cities
spend, cities, counties, States spend and invest in various
public works projects and as a percentage even of what private
philanthropy gets a similar tax exclusion for, aren't we
talking today at a fraction of a fraction of 1 percent?
Mr. Korb. I would think so. I don't have any personal
knowledge. It just makes common sense that is probably true.
Mr. Issa. That is, as one member, what I would say.
Although it is important to look at every issue, I would hope
that we look with the same vigor at the 2, 5 and 10 percent of
budget areas of cities, States and even private philanthropy as
well as we look at this small part that I, as somebody who
enjoys a baseball game, Major and Minor--and I have Minor
League in my district proper--hope that we continue to find
ways to make these things happen.
Mr. Chairman, I appreciate your understanding in bringing
this and your indulgence in the extended questions, and I yield
back.
Mr. Kucinich. I thank you very much.
Pursuant to the earlier order, we now return to the 5-
minute rule.
Mr. Korb, there seems to be a confusion about the 1986 law.
Isn't it true that the 1986 Act, that under that, sports
stadiums were removed from the list of eligible activities for
tax-exempt private activity bonds that exceeded 10 percent
security interest test? Wasn't that the law?
Mr. Korb. What happened, Congressman, as I said earlier,
they were removed as private activities.
Mr. Kucinich. Yes or no? I mean I just need that in order
to understand this.
Mr. Korb. You can still finance stadiums from general tax
revenue even under the 1986 Act. That is the law.
Mr. Kucinich. So you are saying that was the law?
Mr. Korb. That is the law as of 1986.
Mr. Kucinich. Was it the law for private revenue, and
PILOTs are private, right?
Mr. Korb. PILOTs are a substitute for taxes.
Mr. Kucinich. Payment in lieu of taxes.
Mr. Korb. Payments in lieu of taxes are substitutes for
taxes. That is the whole idea.
Mr. Kucinich. But that is the change that you made. That
wasn't the way it was before you made the change, right?
Mr. Korb. No, no. PILOTs, as Congressman Issa said, go back
to 1971. The IRS, when you and I were both in school still, the
IRS indicated that PILOTs are general.
Mr. Kucinich. Here is what I don't understand then if that
is true.
Mr. Korb. This is very confusing. I can understand you are
confused.
Mr. Kucinich. Wait. No, I am not confused about this. What
I am wondering is if that is true, why did the Yankees need a
Private Letter? If what you say is true and Mr. Issa pointed
out back to 1971, help me understand then what circumstances
arose that required that the Yankees have a Private Letter?
Mr. Korb. Well, these have to be governmental bonds, so
they only can be paid out of generally applicable taxes. So the
Yankees wanted the IRS to confirm under the 1997 regulations
that these payments are going to be treated as generally
applicable taxes.
Mr. Kucinich. Have you done this before or did you have to
make a special ruling that changed the nature of payment in
lieu of taxes for this particular case?
Mr. Korb. No. This is the law from the 1997 regulations.
Mr. Issa. Mr. Chairman, I would ask unanimous consent that
the 1971 ruling that makes this the case be entered into the
record. I think it may help clarify.
Mr. Kucinich. So ordered.
Mr. Issa. Thank you.
Mr. Kucinich. We will put this in the record.
Mr. Korb, if an applicant seeks a Private Letter Ruling,
must the IRS give it or does the IRS have discretion?
Mr. Korb. To give a Private Letter Ruling? Unless it is a
no ruling area, we generally give the Private Letter Rulings.
Mr. Kucinich. In your earlier testimony, you stated that
while attorneys you work with at the IRS interpreted the law in
the 1997 regulation in one way, other attorneys may have
interpreted it differently. Now a central element of the
Private Letter Ruling you granted the Yankees was tax-exempt
bonds to finance the new Yankee Stadium would fulfill a public
purpose.
I want to quote from your Private Letter Ruling. ``Here,
the payments in lieu of taxes are designated for a public
purpose. The PILOTs, or payments in lieu of taxes, are being
used to pay the debt service on the bonds which were issued
specifically for the purpose of financing the stadium to
promote and encourage economic development and recreational
opportunities in the city.''
That is from your Private Letter Ruling.
Now, as you have heard, there is a consensus among the
economists that stadium construction does not lead to economic
growth. So my question to you is did the IRS simply accept at
face value the claims of stadium financing applicants that the
stadium would achieve economic development or did you try to
verify the representations?
Does the IRS consult academic literature? How do you come
to that frame of mind that says, OK, we are going to have a
Private Letter Ruling here, and this is the way it is going to
go?
Mr. Korb. Well, that is a good question. Let me point out
the law here because we always need to follow the law here.
Under the 1997 regulations, the PILOTs are treated as generally
applicable taxes if the payment is, one, commensurate with and
not greater than the amounts imposed by tax of general
application and, two--I am waiting for him to finish.
Mr. Kucinich. Go ahead. I am listening.
Mr. Korb. And, two, designated for a public purpose and not
a special charge.
And so, as our lawyers look at the law, we have to apply
the law as it is set forth in the 1997 regulations. The PILOTs
were based on generally applicable tax. It was a real property
tax, and the stadium was for a public purpose.
Mr. Kucinich. How do you determine that the financing would
fulfill a public purpose? What did you describe as that public
purpose?
Mr. Korb. Well, it is kind of interesting there because the
regulations specifically contemplate a stadium being financed
with the generally applicable ticket tax. I would have your
assistant look at example 11 in the regulations there and ask
himself the question, how can we treat a stadium different for
purposes of the public purpose standard and the PILOT rules? It
is a law that was written by the Clinton Treasury and had an
example in there that said that a stadium qualified.
We have to follow the law. We have no choice.
Mr. Kucinich. And no discretion?
Mr. Korb. On that point, no, we really don't.
Mr. Kucinich. Mr. Souder.
Mr. Souder. Mr. Chairman, I want to ask a question about
the process. Doesn't Mr. Issa get a regular five now as well?
Mr. Kucinich. Yes. I am sorry. Of course.
Mr. Issa.
Mr. Souder. I appreciate going to me first, but I have a
slightly different angle, but if Mr. Issa would like to take
his five.
Mr. Issa. OK, then I will take my first.
Following up, I heard the economist-settled question, but
it wasn't settled in my mind.
Your standard for whether it benefited a region was
determined by the people of New York and particularly the area
surrounding the baseball park. They felt, the city of New York
in granting all the eminent domain and everything else, they
felt that this was a qualified redevelopment. They felt that
this would benefit the economy of their city.
So when we heard earlier from an economist, we heard that
on a macro sense the world was not better off because moneys
were spent in New York. It didn't help people in Kabul or
Islamabad or, for that matter, perhaps in California. But that
was a macro statement. There was no statement that it didn't
help the local areas. Just the opposite, I believe I heard that
it may help a local economy, but it had no net effect, and that
was what was being given to us.
Is that what you heard and is that the basis that you have
to go on of an economic benefit? The city thought there was an
economic benefit for that region, right?
Mr. Korb. Well, we have an easier time of it because we
just look at regulation and our past rulings, and we have to
follow the precedent. That is what we have to do, and the law
was laid out very clearly.
There was a 1972 ruling that permitted deductions for
amounts paid by sponsors of a steeplechase race to promote
tourism, and they said that money was expended by a State, and
promoting tourism in the State is for exclusively a public
purpose.
We just can't make it up as we go along as much as you
might want to do that. We really have to follow the law as it
is written, and that is one of the reasons, Mr. Chairman, we
decided that it made sense here to propose a change in the law
so that our successors in this job, the job I have right now,
will be able to apply that rule.
Mr. Issa. Excellent.
Mr. Chairman, I would also like to put into the record an
economist's study from the Robert A. Woods professor of
economics at Smith College in Massachusetts. It is from May 1,
2004, and it specifically deals with Atlantic Yards, estimating
that the total of $2.93 billion over 30 years or a net present
value of $1.08 billion would be the advantage for that
operation. Although it may not be the one that is going to
carry the day, it certainly seems that independent bodies such
as a university economist very much believe that there can be a
net economic benefit, and I ask that be placed in the record.
Mr. Kucinich. Without objection, so ordered.
Mr. Issa. Thank you.
As we wind this thing down, first of all, I want to thank
you for being here and for representing so well the obligations
of the IRS. As I understand it, you are one of the least
stocked with political appointee bodies there is.
Mr. Korb. There is only two of us, the commissioner and me.
That is it.
Mr. Issa. Right, you and the Commissioner.
Unlike other organizations, and we oversight a lot of these
in which we hope that administrative appointees get in there
and beat up the bureaucracy, you essentially work for an
organization that is the most apolitical organization that
there is, from what I can see.
Mr. Korb. And the organization is very proud of that.
Mr. Issa. We are proud, too, to know that what we pay to
the IRS stays at the IRS, so to speak, and they do a great job
of revenue collection. I think that is my closing question.
Essentially, isn't it your job and your organization's job,
every person at the IRS, to collect every possible nickel on
behalf of the American people that public law allows?
I don't mean to twist and turn, but I mean that given a
bias, your bias is toward revenue collection, isn't that true?
Mr. Korb. People don't like to hear this, but one of our
important jobs is to protect the fisc. That is exactly right.
Mr. Issa. In a sense, if we had given you some ability and
if that ability would allow you to say, no, please go issue
those bonds but we want our cut of it, you would have done
that.
Mr. Korb. Exactly.
Mr. Issa. And you would have done it in 1971, in 1986, in
1997 and in this millennium. So over Republican and Democratic
Congresses, Republican and Democratic administrations, your
body has been tied by two things: one, the law and, two, the
continued will of the Congress not to change that law. Even
when we overhauled in 1986, we ultimately did and then undid
the guidance because of the very nature of what these stadiums
represent to communities and to our cultures, isn't that right?
Mr. Korb. That is correct. That was a bipartisan effort at
that time too. People forget that, but the other body was
Republican in those days.
Mr. Issa. Thank you and thank you for your being here
today.
Thank you, Mr. Chairman.
Mr. Kucinich. I thank the gentleman.
Mr. Souder.
Mr. Souder. Thank you, Mr. Chairman.
I wanted to make a few general comments because I haven't
had much opportunity to participate in the hearing for a
variety of reasons, not the least being chopped up with votes
on the floor and then a committee markup.
I have a couple of frustrations. I know that the chairman
is generally very fair person, but I was very concerned that
there really hasn't been debate in the panels and had you not
so generously allowed the gentleman from Dayton to come up
here, we would have never heard debate during this.
I came in more receptive to your position, and as I
listened to the earlier panels and then read the testimony, I
am less convinced now of the problem than I was when I came in
because when you only hear witnesses stacked one direction, and
most of the last panel is, you wonder what they are hiding. I
felt that there were a number of appalling gaps in the
presentations in the first and second panel. For example, what
would have happened had a stadium not been in downtown Detroit,
Seattle or in New York?
If you take an undervalued property in a brownfield in an
urban center and then instead of doing it there, go out to the
suburbs at an interstate exit, the displaced property values.
In other words, part of the reason there are public incentives
on downtown properties is because in these brownfields, for a
variety of reasons--environmental, crime, transportation
systems--the private sector isn't investing in those.
But if we put the stadiums out and made it a pure profit
venture, they would go out and displace because the basic
assumption in these financial analyses that we heard beforehand
is that there is a lost dollar value to the community.
But if you put a less return property that doesn't
generate--if indeed you accept the premise that they don't
generate a lot of other revenue around them--in an area that is
a high value value-added to the area, for example, at
interstate exits and others, you would have to have a whole
different financial calculation. In other words, there are huge
gaps in just trying to present this as an almost anti-
capitalist venture because if the capitalists did a pure
market, they would have a different pattern. There is a
secondary agenda, and that is to revitalize certain areas.
Also, and this disturbs me because, under oath, one of the
witnesses said that all of these sports areas had failed to
achieve their community goals. That is a very broad sweep, and
it was under oath. In particular, what I think is important to
ask, and I have to head to the airport like the other members
and maybe it will come up in the last panel or hopefully if any
of the witnesses want to respond in writing to the hearing
record.
Is this true of Minor League Baseball? What about Dayton?
That was a very compelling case. Minor League Baseball teams
have a different challenge than many of these major urban areas
and the question of have some of them worked, some of them not
worked.
Can you make a uniform statement and what kind of responses
are there to Dayton, to other areas that have had more mid size
and smaller size city efforts? This is a debate going on in my
hometown of Fort Wayne, IN. It is a debate that goes on in
smaller and mid size cities all over the country, and the
challenges of many of our really hard hit urban centers are
substantially different than the challenges, similar, may rhyme
but substantially different than the challenges faced in small
town America or mid size city America.
By having a hearing that implies that any public bonding of
any type of sports franchise always fails and lets that stand
undebated until mid to late afternoon and when most of the
press corps has left is just, I believe, not fair. We should
have had this debate on the first panel, and I hope in the
future the chairman realizes that his own cause can be
furthered by letting members, who may start receptive, hear
some cross-correlation and debate in the panels.
I yield back.
Mr. Kucinich. To my good friend, Mr. Souder, our majority
staff had worked with the minority staff and offered them the
opportunity to choose witnesses. They chose two witnesses for
this hearing. One was the gentleman from the Dayton Dragons,
Mr. Murphy, who asked to testify earlier, and the other one is
Michael Decker who is the senior managing editor of the
research and public policy of the Securities Industry and
Financial Markets Association.
In addition to that, we made an effort to have Major League
Baseball come and testify. They have refused.
The representative of the IRS, Mr. Korb, certainly
represents a point of view that is, I would say, vastly
different than some of the witnesses that we asked to come
forward.
So I think that anyone who was watching this would feel
that they have been able to get both sides of the question
because there are two sides, and I want to make sure that they
are presented here.
I thank the gentleman for expressing his concerns.
We are going to go to just a final round of questions for
Mr. Korb, and then we are going to go to the fourth panel. I
appreciate continuing appreciation for your presence.
I want to address the issue of the decision to cancel a
public hearing and begin by asking you what is the status of
the rule change now?
Mr. Korb. That is a good question. I meant to cover that in
my opening statement. Where we are right now is we are in the
process of reviewing the public comments on the proposed regs,
and we anticipate receiving more, and we will be making a
decision as to whether to finalized the proposed regulation in
the form proposed hopefully before the end of the summer.
I don't have the facts on this particular hearing. We could
followup for the record. Often times, nobody requests to come
in, and so if nobody requests to come in, then we will cancel
the hearing. I don't know the facts of this particular one, and
we can submit that for you later. I can tell you exactly what
happened here.
Mr. Kucinich. Well, are you aware? You are saying that
rule, it still is in the proposal level and that it is has not
gone into effect?
Mr. Korb. Oh, right, it is still proposed, absolutely.
Mr. Kucinich. In your Notice of Proposed Rulemaking, you
notice a public hearing on this proposed rule change. It was
set to occur on February 13, 2007. Did this public hearing
occur?
Mr. Korb. No one asked to attend.
Mr. Kucinich. That was the reason for the cancelation?
Mr. Korb. Right. We don't, we have to pay for the room, so
if nobody is going to attend, we are not going to hold the
hearing.
Mr. Kucinich. Are you aware that you did, in fact, receive
a comment from a Mr. Daniel Steinberg of an organization known
as Good Jobs New York? In it, he presents an argument based in
large part on testimony given by the New York City's Department
of Finance that payments in lieu of taxes are not equivalent to
generally applicable taxes.
I want to quote from a copy of a letter that was sent, I
believe, to your office on April 25, 2005: ``New York City's
Corporate Counsel, Michael Cardozo argued that PILOTs, payments
in lieu of taxes, are not the same as taxes.''
This is in inner quotes: ``Contractual rights to receive
payments in lieu of taxes in the future directed by the mayor
pursuant to economic development agreements are not revenues of
the city. They are, instead, contract rights that can be
transferred or otherwise disposed of by the mayor.''
It goes on to say: ``And they are therefore not subject to
payment into the general fund and subsequent appropriation.''
Do you think that Mr. Cardozo, who was representing the
city of New York at a public hearing of a committee of the New
York City Council, made a valid point about the distinction
between tax revenue and payments in lieu of taxes, if you could
answer that question?
Mr. Korb. Sure. At this point in time, since we have a
notice and comment process, I don't want to prejudge where we
are going to come out in this regulation, and so when I testify
at hearings like that, that is the answer I give. We are in the
middle of a process. It is best to wait until all the comments
are in.
When did you say we received this?
Mr. Kucinich. The staff could make a copy of this for you.
Mr. Korb. I am just wanting the date.
Mr. Kucinich. January 16, 2007, and that was the closing
day.
Mr. Korb. So it is one of the comments. All right, fine,
that will be taken into account, clearly, as part of this
process. Our people review all the comments. I think there were
just a handful, a couple. This is a thoughtful process. We take
our responsibilities very seriously.
Mr. Kucinich. Are you familiar with those comments when
they come in?
Mr. Korb. No, no, no, I do not, no. Remember, we have
hundreds of regulations projects going on at any on time.
Mr. Kucinich. In reading your proposed rulemaking, I am
looking for evidence that you made a distinction between tax
revenue and payments in lieu of taxes. Have you made that
distinction?
Mr. Korb. In the proposed regulation?
Mr. Kucinich. I am just saying from my reading of the
proposed rulemaking, there is no evidence.
Mr. Korb. I have it right here. The thing that we put in
the Federal Register on October 19, 2006, that defines the
commensurate standard. Is that what you are looking at?
There is a Section 1.141-4, Private Security Payment Test,
E5, Payments in Lieu of Taxes. Is that what you are referring
to?
Mr. Kucinich. Right.
Mr. Korb. What is the question?
Mr. Kucinich. The question is where is the evidence that
you considered the distinction between tax revenue and payments
in lieu of taxes?
Mr. Korb. Well, when you look at the rule here, remember,
what we are trying to define here is the first part of that
test. Remember, I talked about that two-part test, the
commensurate, we will call it the commensurate with generally
only applicable taxes. The way this rule, what we do is we have
a series of rules here, and again there is a real
misunderstanding of what we did, OK, and maybe you ought to
have your guys go back and look at it.
Mr. Kucinich. Actually, you and I are looking at it right
now, sir.
Mr. Korb. OK, but what we have done here is we have tied
payments in lieu of taxes in a way so they tie into taxes. What
are generally applicable taxes? The 1997 regs were much looser.
So now, if you look at the rules we have set out here,
basically, the way you would comply with this is you would
value the property.
You should know, Mr. Chairman, Ohio, we have a very unusual
situation based on a 1948 case dealing with the Cleveland
Municipal Stadium. Even though that was a city-owned property,
that was a taxable property on the real estate rolls. I don't
know if you knew that or not. McBride, the guy who owned the
Browns, lost the case where he claimed that since the city
owned it, he didn't have to pay real estate taxes, OK.
So the way this would work--if you think about this, it
makes sense--is that you would value the property----
Mr. Kucinich. You can continue, really. I can walk and chew
gum at the same time, and you can continue.
Mr. Korb. All right, that is fine.
You value the property as you would any other commercial
property. You have an assessment rate, and you apply the tax
rate. So they are trying to equate. That is the way you would
want to do this, it seems to me, if you want to figure out what
is a generally applicable tax, and that is what these rules do.
Mr. Kucinich. Well, as the flow of this hearing goes and I
saw this letter from Steinberg, I was wondering if there was
just a coincidence that he provided comment to the IRS on a
proposed rulemaking, and IRS canceled its public hearing.
Mr. Korb. He wasn't the only one who commented. We had
other comments as well.
Mr. Kucinich. So then why wasn't there an effort?
Mr. Korb. He must not have asked for a hearing. If he had
asked for a hearing, we would have had a hearing.
Mr. Kucinich. We have this correspondence that shows that
he was making a distinction between the tax revenue and
payments in lieu of taxes, and what I am wondering is as he was
making that distinction that seemed to run a little bit
contrary to the IRS' rulemaking on this. So what I am asking
you is after hearing this discussion in this committee today,
do you have any interest in a public hearing?
Mr. Korb. We will go back and take a look at it. I mean I
don't know why not, but I will go back and look. We would have
to go through I don't know what the legal process is.
Mr. Kucinich. Do you have the discretion to?
Mr. Korb. I don't know. I would assume I would. I am the
Chief Counsel, right. So we will figure it out. We will figure
it out.
And let me tell you it is not uncommon. I have had
experience in the past when I was here before where Members of
Congress have actually come and testified at the hearing. So we
would welcome that. This is an open process, OK. This is a very
open process, and so we welcome comments. We want to know this
from all sides. We welcome that.
And I think you would want me. I will be one of the two
decisionmakers here basically along with the Assistant
Secretary. You would want me to have an open mind at this point
until all is said and done, I would hope.
Mr. Kucinich. I appreciate you describing it as an open
process, but I would guess that until we have had this open
discussion, there have been elements of this process that have
been lacking in transparency. Private Letter Rulings are, by
their nature, as you indicated at one point, limited in how
much is able to be disclosed when you are talking, and I
understand that.
Mr. Korb. There is a reason for that. Remember the tax law,
yes.
Mr. Kucinich. I understand that much. On the other hand,
when you get from tax policy that goes from an individual
taxpayer following the tax laws of this country to an applicant
for a particular privilege where they transit from private to a
public interest, it puts it in realm that is somewhat unique.
Therefore, the purpose of this hearing, which is to delve
deeply into issues of the circumstances under which tax-exempt
financing is offered, has its relevancy in raising the
questions, not only about transparency but as Chief Counsel how
do you make these distinctions. If that is not very clear
coming out of this hearing, then the public may still have some
lingering questions as to whether or not some people received
some benefits that maybe under the circumstances they shouldn't
have received.
Mr. Korb. Can I respond to that?
Mr. Kucinich. Yes, sir.
Mr. Korb. All right, three things: No. 1, as part of our
comment process, when we put out the final reg, we detail
comments. We discuss the comments, and we explain why we don't
adopt comments or why we would adopt the comments, totally
transparent. You can send one of your aides down to our reading
room right now and get a copy of every single letter that is
filed on comments for our regulations, totally open.
I just want to reiterate again. You make it sound like we
somehow closed this guy out. No one requested a hearing, and we
do not hold hearings if they don't, people don't request them.
If somebody had requested a hearing.
Mr. Kucinich. If I may, that is an interesting point. I
mean you are saying under no circumstances would you ever hold
a hearing unless somebody requested it, no matter what the
level of public policy was involved.
Mr. Korb. What would be the purpose of the hearing if
nobody showed up?
Mr. Kucinich. It seems to me, going back to my days in city
council, that there are certain requirements in the public
interest for even a zoning matter, that people receive a
notice, on a liquor permit, that people receive a notice so
that they have an opportunity to be able to testify. Some of
these hearings took place whether people showed up or not.
The question is, as a matter of public policy, do you see
any reason to go forth and hold public hearings and demonstrate
in good faith, bringing out these issues in a transparent way?
Mr. Korb. I am not an expert in administrative law, but I
would be quite concerned if we are not following the
administrative procedure act or whatever it is. We will take a
look. We will take a look. We could have a hearing.
Mr. Kucinich. Well, I think this hearing would prove to you
there is an interest in payments in lieu of taxes as a matter
of policy.
Mr. Korb. Well, it may now with this publicity. Sure, that
is possible. But I am saying nobody asked. I am being honest
with you. Like you, I am a guy from the Middle West here. I am
telling you, nobody requested a hearing, OK. Nobody requested a
hearing.
If somebody had requested a hearing, we would have had a
hearing.
Mr. Kucinich. On matters of tax policy like this, the
general public may not have access to the policy implications
of the kind of rulemaking that you are talking about, and as a
result of publicity related to this, it seems to me there may
be a higher degree of interest.
Mr. Korb. All right, there might be. Don't get me wrong; we
have hearings all the time. All the time, we have hearings. We
have hundreds of regulations that we are working on at any one
point in time.
I will tell you, though, it is not uncommon either for
nobody to request a hearing. It is expensive to come to
Washington, all sorts of things. That is why I think the APA
uses the public.
You know anybody can write in, and I will tell you from my
experience, our people, the people at Treasury take that very
seriously. They compile a list of all the comments that come
in. They go through and digest them. It is amazing, the effort
that goes into this, and that is what you would want, you would
expect, you would demand, and that is done.
Mr. Kucinich. Again, transparency has symmetry if you have
a transparent process where you are able to determine the
distinction between tax revenues and payments in lieu of taxes
on the one hand and whether you are holding public hearings or
not. This committee is interested in how the process that you
are involved is able to be determined by the public so that in
the event that people want to participate.
I am interested in how you arrive at reaching out to the
public to let them know what you are doing because we are not
just talking about an ordinary tax matter here as you well
understand which is one of the reasons why we needed to hear
from you at length, and you testified as to the complexity of
this.
Mr. Korb. It is very complicated.
Mr. Kucinich. But at the same time, the complexity of it
would seem to put a higher standard upon the IRS to reach out
and let the public know about the implications of this. You
make a lot of efforts, gratefully, to simplify tax forms. It
would seem to be in the public interest for you to make an
effort to simplify a discussion of a complex tax matter as a
matter of public policy.
I want to thank the gentleman for his presence here, for
his being with this committee process for the better part of
this day. You have absolutely made a good faith effort to
describe the policy, to communicate your position to this
committee, and the committee is grateful for that, and I thank
you.
Mr. Korb. Thank you. I appreciate it.
Mr. Kucinich. I am going to call the final panel now.
Will the witnesses rise, please?
[Witnesses sworn.]
Mr. Kucinich. Let the record show that the witnesses
answered in the affirmative.
We are fortunate to have an outstanding group of witnesses
on this panel.
We have Mr. Neil deMause, a native New Yorker who has
written for the Village Voice sports section, New York Newsday,
Sports Jones, and the Guardian Newsweekly. He is a regular
contributor to several progressive publications including Z
Magazine. His book, Field of Schemes: How the Great Stadium
Swindle Turns Public Money into Private Profit, casts a
critical eye on the use of public funds to build new sports
stadiums.
The next witness, Dr. Heywood Sanders, is a professor in
the Department of Public Administration at the University of
Texas, San Antonio. Dr. Sanders is among the best known
independent critics of publicly financed convention centers. He
served as a Senior Program Analyst at the Office of Evaluation,
Community Planning and Development of the U.S. Department of
Housing and Development. His publications include Convention
Myths and Markets: A Critical Review of Convention Center
Feasibility Studies and Challenging conventional Wisdom: Hard
Facts about the Proposed Boston Convention Center.
Finally, the third witness, Michael Decker is a senior
managing director of research and public policy for the
Securities Industry and Financial Markets Association which
promotes policies and practices designed to expand and perfect
markets, foster development of new products and services and
create efficiencies for member firms. The Industry and
Financial Markets Association seeks to preserve the public's
trust and confidence in markets and industry and was created as
a result of the 2006 merger of the Bond Market Association and
the Security Industries Association.
Gentlemen, thank you for your presence.
Mr. deMause, you may proceed with your testimony.
STATEMENTS OF NEIL DEMAUSE, AUTHOR, BROOKLYN, NY; HEYWOOD
SANDERS, PROFESSOR, DEPARTMENT OF PUBLIC ADMINISTRATION,
UNIVERSITY OF TEXAS, SAN ANTONIO, TX; AND MICHAEL DECKER,
SENIOR MANAGING DIRECTOR, RESEARCH AND PUBLIC POLICY, THE
SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION,
WASHINGTON, DC
STATEMENT OF NEIL DEMAUSE
Mr. deMause. Good afternoon. I would like to thank Chairman
Kucinich and the other members of the committee for holding
this important hearing.
My name is Neil deMause. I am co-author of the book, Field
of Schemes, as well as a business of baseball writer for
Baseball Prospectus and other publications.
In the nearly 12 years I have been researching this topic,
sports stadiums and arena deals have cost local, State and
Federal Governments more than $10 billion in taxpayer money,
and this is on the rise with government spending on sports
facilities now costing more than $2 billion every year.
Advocates of these subsidies insist they are a good use of
public money even as schools, transportation and other public
necessities go underfunded.
Let us examine the arguments. First, stadium boosters claim
they provide a shot in the arm to local economies. I have yet
to find any independent economists who see any significant
positive impact from stadiums. It is not just the people
testifying here today. Studies with cities with new stadiums
have found no sign of increased per capita income. In terms of
job creation, they typically cost as much as $250,000 per each
new job which is simply a terrible bang for the buck.
While stadiums are often built to take advantage of already
rebounding districts like Baltimore's Inner Harbor, there is no
sign they can create new development by themselves. As Chairman
Kucinich is no doubt aware, a block or two away from Jacobs
Field in Cleveland, you see the same shuttered stores as
before.
Team owners often claim they will move if their demands are
not met, but most often they are just crying wolf to shake
loose a few more taxpayer dollars. Both the Chicago White Sox
threatened to move to Tampa Bay and the Minnesota Twins to
North Carolina. It turned out to have been ideas hatched in
Governors' offices to scare locals into coughing up funds for
new stadiums at home. White Sox owner, Jerry Reinsdorf, later
admitted he would never leave the Nation's third largest media
market for one of the smallest, but he explained ``A savvy
negotiator creates leverage.''
Yet, even when there is no viable move threat, we still see
cities bidding against themselves. Washington, DC's $611
million gift to the Nationals was even more incredible
considering no other city made a viable offer to build a
stadium.
Team owners say their current homes are economically
obsolete. In other words, they can make more money with a new
one so long as they didn't have to pay for it. As places to
watch sporting events, though, new facilities are often worse
than the old buildings they replaced. Cheap seats are fewer and
farther from the action thanks to layers of corporate seats
pushing upper decks skywards, and fans can expect to pay more
for the privilege. Baseball teams moving into new parks raised
ticket prices by an average of 41 percent their first year
alone.
The latest edition to the stadium playbook is hidden
subsidies such as free rent, tax breaks and infrastructure
expenses. New York City Mayor Michael Bloomberg promised new
Yankees and Mets stadiums would cost taxpayers nothing. In
fact, as you will see in my written testimony, after tax and
rent kickbacks, the public share was almost $800 million, more
than the teams themselves end up spending.
Harvard researcher, Judith Grant Long, has found that once
hidden subsidies are accounted for, the average stadium now
costs 40 percent more than publicly reported, and that figure
is on the rise.
As someone who writes critically about public spending on
sports facilities, I am often asked, do you hate all stadium
deals? Now, certainly there is a price deal where it would make
sense for cities to contribute a small share for stadiums, but
in reality there are very, very few examples of good deals for
the public. I think if we grant the argument that Dayton's
stadium is a good one, for every Dayton, there are a hundred
Aberdeens where we are seeing the State of Maryland being asked
to bail out a money-losing stadium.
This points to the sports industry's dirty little secret.
New stadiums don't make money. While teams are quick to paint
new buildings as cash cows, the new revenues are almost never
enough to pay for all the land and construction costs.
This is important. Teams don't want new stadiums because
they make money. Teams want new stadiums because of the public
subsidies that come with them.
Now, there are several ways that Congress can act to stop
wasteful spending on sports facilities. First, close the
loophole we have been talking about today that allows sports
teams to use Federal tax-exempt bonds. Kansas City Royals fans
would no doubt not be pleased to learn that their tax dollars
are going to help make the New York Yankees and Mets even
richer, and I think no one would be pleased to learn that the
New York Yankees and Mets were able to go before the New York
City Council and argue that these were stadiums being built
entirely with private funds and then go to the IRS and say, no,
no, no, all this money is actually tax dollars.
Second, drastically restrict the business retainment
deduction for luxury box and club seat purchases. Take away tax
subsidies for businesses to buy tickets to sporting events, and
you will reduce the demand for new stadiums and leave more
tickets for the average fan who can't take a tax deduction on
spending a day at the ballpark.
Finally, put the brakes on for all industries holding
cities hostage for tax subsidies with legislation such as that
proposed by your former colleague, David Minge, which would
have taxed all direct and indirect subsidies to corporations as
income. A team owner asking for $500 million stadium subsidy
might think twice if he was going to face a $150 million IRS
bill as a result.
In the rush to build new sports stadiums, we have lost
historic ballparks such as Tiger Stadium and soon Yankee
Stadium. We have seen public parks destroyed and thriving
neighborhoods disrupted. We have hastened the transformation of
sports fandom from an experience that brought together people
from all walks of life into one that is affordable only to the
well heeled, and we have cost local, State and Federal
Governments billions of dollars.
In polls and referendums, voters across the political
spectrum are consistently opposed to spending sorely needed tax
dollars just to make rich sports teams even richer. To our
elected officials, I say the ball is now in your court. Thank
you.
Mr. Kucinich. Thank you, sir.
[The prepared statement of Mr. deMause follows:]
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Mr. Kucinich. Dr. Sanders.
STATEMENT OF HEYWOOD SANDERS
Mr. Sanders. Thank you, Mr. Kucinich. It is a pleasure to
join you and your committee colleagues here this afternoon.
If we look at the title of this hearing, it is really quite
striking. I get to be the Tail End Charlie in dealing with
convention centers and publicly financed hotels. The title
poses the question, do these facilities deliver as promised? To
that, we can give a fairly clear answer. With only the rarest
of exceptions, absolutely no.
Why? Why are convention centers such a modestly productive
public investment? In part, because so many cities have chosen
to invest in these same facilities in recent decades. From
about 32.5 million square feet of exhibit hall space in 1986,
the best count we have is now in excess of 66 million. We have
more than doubled the stock of exhibit hall space in this
country, adding new convention centers and expanded ones in
cities across the country. I note, however, Cleveland is an
intriguing exception as is Dayton, as I understand it.
With this incredible development of convention centers at
public expense has come a situation of over-supply and
increased competition with relatively modest growth in the
demand for convention facilities. Out of town visitors that
cities expect and anticipate, the visitors that are forecast to
come to these convention centers, come in far more modest
numbers than expected and in recent years in even fewer numbers
as the years go on.
The result is a situation where from one end of the country
to the other, cities of all sizes are offering a variety of
incentives and discounts and giveaways in order to try and lure
convention events and their attendees to their communities. I
note that St. Louis offers folks their convention center rent-
free this year if you feel like going to St. Louis with some of
your friends and colleagues.
The promises inherent in these forecast are equally
intriguing. I recall the case that you actually alluded to in a
study I did in 1997, the proposed Boston convention center. I
was quite struck that the consultant for the Commonwealth of
Massachusetts forecast that with a new convention center,
Boston would add in excess of 750,000 hotel room nights. That
is one room in a hotel occupied for one night each year, a
total that would grow and remain fairly stable.
I was rather more pessimistic, given my assessment of the
market. I concluded that their hotel room night generation
would be rather on the order of half that figure. It turned out
that for last year, it came to about 340,000, a bit shy of the
770,000 anticipated.
It is also presumed that every convention and trade show
attendee will spend in excess of $1,000 in a city and stay 3\1/
2\ days, and we have a great deal of evidence including the
Boston case but a great many others, that simply doesn't occur.
The expectation of a convention center, that at the very
least it will bring visitors from out of town and yield a great
deal of new private investment, precisely the kind of private
investment and development Mr. Murphy was talking about in the
Dayton case, we should see that were we to look. Private
investors should flock to build hotels adjacent or nearby new
and expanded convention centers.
Instead, we see a rather different pattern in recent years.
Increasingly, cities are going into the convention center hotel
business, using tax-exempt municipal bonds to build hotels that
are fully publicly owned. In two cases, St. Louis and my own
community of San Antonio, cities have made use of Federal
empowerment zone bonds in a similar fashion to build and
finance hotel development.
Publicly owned hotels in Austin and Houston, TX, Omaha, Bay
City and even one being discussed as a potential for Cleveland
present us with an intriguing case. Cities are trading, going
into a business where private investors have simply perceived
far too great a risk and uncertainty. At the same time, these
publicly owned hotels are directly competing with privately
owned and privately financed hotels directly across the street
in some cases, hotels that do not have the advantage of tax-
exempt municipal bond financing and lower interest rates.
The result has often been to seriously impact the local
hotel market, reduce rates, reduce returns and intriguingly, in
the case of Houston, force a Hyatt Hotel in the downtown area
to foreclosure.
So we, in essence, have a situation where having made an
investment that has proven remarkably modest in terms of its
economic impact and productivity, cities now pour even more
money into the hotels that were supposed to be generated
privately.
Thank you.
Mr. Kucinich. Thank you very much, Dr. Sanders.
[The prepared statement of Mr. Sanders follows:]
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Mr. Kucinich. Mr. Decker, thank you. Proceed.
STATEMENT OF MICHAEL DECKER
Mr. Decker. Thank you, Chairman Kucinich. I appreciate the
opportunity to be here today.
The Securities Industry and Financial Markets Association
represents securities firms, banks and asset managers active in
the global securities markets. Our members include all major
dealers in State and local government bonds issued to finance a
wide variety of public infrastructure. In short, SIFMA's
members serve as the conduits between State and local
governments and the capital markets. We take an active interest
in Federal policy that affects the ability to States and
localities to tap the capital markets to finance new
investment.
The Federal tax exemption on the interest earned by
investors on most municipal bonds gives State and local
governments that borrow in the capital markets a significant
break on their interest rates. In fact, the tax exemption is
one of the most important sources of Federal aid to States and
localities. It saves State and local governments tens of
billions of dollars a year. It requires very little Federal
bureaucracy to oversee and allows State and local communities
to make their own decisions about competing priorities for
capital investment.
The tax exemption represents an ideal Federal-State-local
financial partnership.
Local communities have a long history of using bonds to
finance stadiums and arenas for professional sports teams as
well as convention centers and other projects designed to jump
start economic development and enhance the quality of life
including the 1930 Cleveland voters' approval of $2.5 million
of city bonds to build Cleveland Municipal Stadium which became
the longtime home of the Indians and Browns.
Before 1986, many bonds sold to finance stadiums were
backed directly or indirectly by the professional teams that
used the stadiums as we have learned throughout the day today.
With the enactment of the Tax Reform Act of 1986, Congress
prohibited these kinds of bonds known as private activity bonds
from being used for stadiums and arenas, convention centers and
hotels. At the same time, Congress left the door open for
communities to commit public resources to finance stadiums and
the like.
Since 1986, if a local government wants to use tax-exempt
bonds to finance a stadium, that community has to pledge some
public source of funds such as taxes or other dedicated revenue
to back the bonds. The tax code includes a two-part test for
determining whether a bond issued by a State or local
government is for a public purpose or private activity.
Basically, a bond is a private activity bond if the facility
being financed is used mainly by a private business and the
repayment of principle and interest on the bond is secured by a
private business. If a bond meets those tests, it cannot be
federally tax-exempt unless it meets an explicit exception
which does not include stadiums.
However, if a tax-exempt bond for a stadium or any other
project is backed by a public source of funds, that fund is
deemed to be a public purpose bond. In that case, there are
relatively few tax code restrictions on what the bond may be
used for.
In devising a two-part test for private activity, Congress
clearly foresaw that local communities may want to commit
public resources to finance facilities used principally by
businesses like sports teams. The two-part test wisely
recognizes that decisions on where and how direct public
resources are best made by local communities themselves, not
Congress or the Federal Government, and local communities
shouldn't lose the ability to use tax-exempt financing for
projects that might benefit a private business in addition to
the community overall.
I point out a couple of observations regarding the use of
tax-exempt bonds for sports stadiums in particular. The tax
exemption is important, and it reduces the cost of developing a
sports stadium but only by a little bit compared to the overall
cost of the project. If you take a $400 million stadium deal,
the tax exemption doesn't reduce the $400 million construction
cost of the project at all, and it doesn't eliminate the
requirement to pay interest on the bonds.
It does reduce the interest rate on the bonds and would
save the public developer of the project millions of dollars,
but there still would be a considerable demand on public
resources regardless of whether the stadium were financed with
taxable or tax-exempt bonds.
In addition, if you eliminated the tax exemption on public
purpose bonds used to finance stadiums, you wouldn't reduce the
pressure that sports team owners sometimes place on public
officials to build stadiums using public resources. You would
raise the cost to local governments and actually put a great
demand on resources that local governments would have to meet
in order to finance stadiums and meet team owners' demands.
The debate over whether the economic benefits of stadiums,
arenas, convention centers and hotels justifies the use of
public resources is a controversial one. There is evidence on
both sides of the debate.
SIFMA believes strongly that the decision can only be made
efficiently at the State and local level by the citizens and
policymakers closest to the issues involved. We also believe
that Congress should not disrupt a decades old statute defining
which types of governmental projects should quality for tax-
exempt financing.
Thank you for the opportunity to be here today. I look
forward to your questions.
Mr. Kucinich. I thank the gentleman. We are pleased that
you are here as we are pleased that all the witnesses are here.
[The prepared statement of Mr. Decker follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Mr. deMause, you said something in your
testimony. Among the things you said that caught my attention,
you said that in New York the city government would have a case
presented to it that said that the project involves private
money, and then the same project would go to the IRS and it
would be said that this is a publicly financed project. Could
you go over that again?
Mr. deMause. Sure. I was present at the New York City
Council Finance Committee hearing where the Yankees testified
repeatedly that the City Council should approve this project
because all construction was being paid for with private money.
This is the exact same money that they then called PILOTs and
said were generated.
Mr. Kucinich. Payments in lieu of taxes.
Mr. deMause. Payments in lieu of taxes and told the IRS in
their request for Private Letter Ruling were substituting for
generally applicable taxes.
Mr. Kucinich. And the implications of that? That led to
what?
Mr. deMause. The implications are that they got the Private
Letter Ruling and that they were able to get, to sell the
bonds, and they are now building the stadiums right now.
Mr. Kucinich. Explain this for someone who may have just
come into this discussion, what this implications of this are.
Let us try to take this more into layman's terms.
Mr. deMause. Sure, sure, absolutely. What happened here was
that the Yankees and the Mets decided that it was not
politically feasible to ask for public money for the stadium
construction. They asked for a lot of public money for land and
infrastructure. They asked for tax breaks. They asked for other
things.
But they were building these stadiums that were in one case
about $600 million and in the other case about $1 billion, and
they decided that it was not politically feasible to go to the
City Council and say, we want public money. So they said we are
building it all with private money.
However, they did not want to have to use taxable bonds
because those are expensive. So they said, we have this tax
deal worked out. We think it is going to fly with the IRS where
we can use tax-exempt bonds, lower our costs by passing off
some of the costs to Federal taxpayers by calling these private
payments. We are not going to call them rent because if we call
them rent, we are going to trip the private activity trigger
and we are not going to be able to use tax-exempt bonds. We are
going to call them PILOTs, and therefore the IRS will say OK.
Mr. Kucinich. Have you quantified what that means in terms
of how much Federal tax dollars end up going to subsidize this
project?
Mr. deMause. The numbers--I believe these are city numbers
which I think are a little bit low, but this is the best
numbers that we have--are that the Yankees stadium is
subsidized by $44 million by the Federal Government in foregone
taxes that otherwise they would get from bond holders, and the
Mets stadium, about $32 million.
Mr. Kucinich. It is presented as privately financed, but
the taxpayer subsidy ends up being somewhat hidden because of
these private letters.
Mr. deMause. That is just the Federal tax subsidy, mind
you. That is the amount that their costs are reduced by using
this Private Letter Ruling. There are, again, other tax breaks
and other subsidies that raise the public, the State and city
costs.
Mr. Kucinich. Mr. deMause and Dr. Sanders, would you
comment on the concept of public purpose? What does that mean
to you?
It is obviously a euphemism. How does it work out?
Mr. deMause. Yes, to me, a public purpose is something that
has a broad public benefit. You know the primary beneficiary of
the new Yankee Stadium--let us just take that as an example--
are the New York Yankees. They are going to be reaping all the
revenue from it, and the public will get to go to games there,
but they will be paying at the box office for that.
There was a lot of discussion on the previous panels about
comparing stadiums and, for example, you know, orchestras or
museums, and my feeling is that if the Yankees were owned by a
non-profit corporation and tickets were free on Wednesdays to
the public, there would be a much stronger case for a public
purpose here.
But these are fundamentally private buildings. The lease
with the Yankees and the Mets says they get all the revenues
from the buildings. The city will not have access to them to
use them for other purposes. So they will be owned by the
public in name, but the public will have no use of it other
than being able to buy a ticket and go in.
Mr. Kucinich. Dr. Sanders.
Mr. Sanders. Yankee Stadium is very clearly what it says it
is. It is a baseball stadium that serves the purposes and whose
financial rewards return to the New York Yankees Baseball Club.
That is a private entity. It is a mechanism for allowing that
private entity to make rather more money.
If the city of New York chooses to build a multipurpose
facility and operate that facility as a true multipurpose
facility, making it available for a variety of tenants and a
variety of activities, then we could see a case where that
might be that we would be talking about a multipurpose
facility. We are not here. We are talking about a baseball
stadium.
The issue raised in the material from the New York
Corporation Council goes immediately to the point of whether a
payment in lieu of tax is, in fact, a general purpose tax
revenue or amounts to a short term arrangement, particularly
given the way PILOT payment are defined contractually in New
York City.
Mr. Kucinich. Thank you. Thank you, Dr. Sanders.
Mr. Turner.
Mr. Turner. Thank you, Mr. Chairman.
Mr. deMause, Dr. Sanders, I want to state what I said in
the beginning concerning the chairman's interest in this and
his holding this hearing.
I greatly appreciate your issue identification and what you
are saying as a framework from which communities should look to
in making these decisions. I mean what you are highlighting,
which I think is incredibly important, is that there are many
communities that undertake these types of projects that do so
with inflated expectations and structures and deals that do not
deliver, and they should be very cautious in undertaking them.
When the city of Dayton undertook building the stadium
which we have built, they had first considered a deal for
building a stadium that I was opposed to and voted against.
Ultimately, the deal did unwind that would have been a blank
check by the community and would have resulted in a stadium
that there would have been speculative performance and the
community could have gotten stuck.
The stadium that we did build, it was a different deal as
you heard Bob Murphy talk about. He spoke about the cap that we
put on the expenses to the city. In other words, the team took
the risk, not the community. The community had sources and uses
on a regional basis that they agreed to.
The community does have access to the stadium. The city has
a certain amount of days in which they have access to the
stadium. When John Kerry came campaigning for President of the
United States, he campaigned at the stadium, and the community
came in and assembled in the stadium.
I tell you the story about the first deal to let you know I
am not a fan of these, and when I served as mayor, I was not a
fan of the convention center. But there is an aspect which we
miss if we look at them solely as a subsidy for the team. There
is a much broader impact on the community in having these
amenities that it is very difficult to capture. I notice in
both of your testimonies and reviews, you don't have.
One of the symbols for Rome when we look at tourist posters
is the Coliseum, and there is a reason. It is because it is a
view of the spirit and the way that people came together in
Rome in a very public way.
Mr. deMause, you say that this is just a substitution
effect in economics, that you are cannibalizing from elsewhere
in town entertainment dollars. Clearly, we don't have any
studies that would show in towns where there are stadiums and
sports facilities, that there is any displacement spending,
that their movie theaters somehow sell less or the performing
arts centers or the others somehow have less.
What was important for my community was we did not have any
sports facility. We did not have any place for the community to
congregate. There was no cannibalization because people were
actually taking those dollars and leaving town. They were going
to Columbus. They were going to Cincinnati. They were going to
Chicago. They were going to other places that had an
entertainment sports option.
So the one thing I would just like to challenge you with is
that looking beyond just as you said, Mr. deMause, of there is
no broad public benefit. I mean you just blanketly stated that.
That really is not true, and it is not the experience of every
community.
Your warnings of what communities should be concerned about
are important, but to go to the next step without real data
that can establish that none of the benefits that communities
say they have are there or that the down sides, as you have
characterized them, are only present really sells the whole
thing short as we look to a Federal policy. Mr. Decker was
saying certainly if you look to communities and what their
needs are and the ability to make these decisions, that is
really where we need to look.
So if you can speak on that, I would really appreciate it.
Mr. deMause. OK, there are several questions there. Again,
it is a hearing.
As to whether there are studies on the substitution effect,
it is obviously difficult to measure because there is a lot of
noise in the data. There have been many attempts to do so, and
I am happy to.
Mr. Turner. Which is hard to just to say that it exists.
Mr. deMause. I am sorry?
Mr. Turner. Which is hard then to conclude that it just
exists.
Mr. deMause. We can definitely conclude that the
substitution effect exists because there is a finite amount of
money.
Mr. Turner. You can conclude it is something to be
concerned about, but you cannot conclude its impact.
Mr. deMause. I am sorry?
Mr. Turner. You cannot conclude that it has an impact.
Mr. deMause. You can measure its impact, yes.
Mr. Turner. I thought you just said that it was not
measurable.
Mr. deMause. No, I did not say it was not measurable.
Mr. Turner. Well, what did you say?
Mr. deMause. I said it was difficult to measure, but there
have been attempts to measure it.
Mr. Turner. Attempts does not mean that it has been.
Mr. deMause. There have been attempts. I am not going to
tell you how to decide how successful they have been, but I
will give you an example if you will allow me.
Mr. Turner. Please.
Mr. deMause. OK, in Toronto in 1994, when there was a
baseball strike, all of a sudden people were not spending money
on baseball games. There was an absolute rush in other
industries such as video rentals, comedy clubs. Everyone else
reported enormous increases in their business.
Mr. Turner. Wait a minute. That is when something is
closed. You can't show by that, that it would have been
sustained or that it had been taking moneys from those venues
previously.
Mr. deMause. The assumption is that if people, when given a
choice to spend money on baseball are spending it on baseball
and when they are not given a choice to spend money on
baseball, they are spending it on something else. The
assumption is, and it seems a valid assumption to me.
Mr. Turner. When it reopened, did it go down?
Mr. deMause. May I finish?
Mr. Turner. Did it go down when it reopened?
Mr. deMause. May I finish?
Mr. Turner. Please.
Mr. deMause. The assumption is yes, it did go down when it
reopened to my knowledge.
Mr. Kucinich. I didn't hear that. The assumption is what?
Mr. deMause. I am sorry. The assumption is that people are
choosing to spend their money in one of two places, and I am
happy to send you studies. I don't have them on me, but I have
them at home. I am happy to send you studies looking at the
substitution effect.
I will absolutely agree with you that it is different in a
city like Dayton than it is in a city like Toronto or a city
like Washington, DC or New York. If you can cannibalize
spending from somewhere else, then that is good for you and it
is bad for Columbus. I am not sure that is a public interest
from the Federal perspective, but it might be good for Dayton.
However, I would caution you and other cities that the
impact is dramatically less than is claimed. So the quote by
Allen Sanderson, the University of Chicago economist who has
looked at this, is that you could do better by taking the
money, the same amount of money up in a helicopter and throwing
it out the window over your city, and I think that is a point
well made. Not that you would be going up in a helicopter, but
that what else could you could you be doing with this money and
what else could you be doing to improve Dayton and could you
get a better bang for your buck?
Mr. Turner. Mr. Chairman, I know it is just the two of us
if you could humor me for just a moment.
The difference, in effect, as you heard in the testimony,
is there is a $250 million development that is planned around
the baseball stadium in an area where there was nothing in
addition to two corporate headquarters that have moved in where
there was nothing. Even if you took the amount of money that
was spent on the baseball stadium and the amount of public
money that was spent on the baseball stadium and offered that
as a subsidy to all the businesses and to the development that
is there, you would not have attracted this development.
The people are coming to this development not because of
the subsidy that could have been offered to them instead of the
stadium but because of the people that are coming down, the
hundreds of thousands of people who were not there in this area
before that are now foot traffic and are there.
Mr. deMause. If that is true and if you are really
leveraging the money to create this other development, I think
that is a great deal. But I think that baseball stadiums and
football stadiums in particular are terrible catalysts for
these purposes because of what Joyce Hogi mentioned in her
testimony earlier. They are dark most of the year.
So if you were to take the money and put it into something,
even an arena which can at least be used 365 days a year if you
have to do something sports, that is generally a better
investment, if not something else like, you know, new street
lights or better schools or something else that can be used all
365 days a year.
Mr. Turner. Mr. Chairman, as I was saying before to both of
them and to you, I agree with everything that they say as to
why we should be concerned and how these deals can be a problem
and, to some extent, not deliver.
My concern is in trying to making the points with them, and
I appreciate, Mr. deMause, your concession of that. It is not
necessarily true of every deal of every community. There really
are some, and Dayton could have done a bad deal and it could
have resulted in a bad community. There are communities that do
it. There are those who do well.
Taking a broad brush and then trying to do Federal policy
is the problem because some are good and some are bad.
Thank you, Mr. Chairman.
Mr. Kucinich. In the interest of providing as much time for
both sides, I have provided my friend with an extra 5 minutes
because I think that he has a point of view that needs to be
heard.
Mr. Turner. Thank you.
Mr. Kucinich. I want to thank the gentlemen for being here
to answer these questions.
I think that what we have done today is we have opened up a
broad discussion of public policy with respect to taxpayer-
financed sports stadiums, convention centers and hotels.
I think it would be useful for this committee to have some
followup work that would quantify city by city, project by
project, the amount of money the project involved, how much was
taxpayer-financed, how much private financing was in it, what
the measurable economic benefit was in the community in terms
of jobs created. Perhaps rank it by the local economies,
starting with the dates that the projects started and ending
the construction phase with a general commercial phase
afterwards.
I think it would be helpful if we could start to really
look at some numbers down the road. I know perhaps some of you
have already done that. We will gather the information and take
it to a second step.
Then Mr. Issa, I believe, had raised the issue about the
campaigns that are presented to the public which assert that
there will be certain benefits if the public will agree to
support the plan. So I am interested in acquiring that
information as well.
This has been a hearing of the Domestic Policy Subcommittee
entitled, ``Build It and They Will Come: Do Taxpayer-Financed
Sports Stadiums, Convention Centers and Hotels Deliver as
Promised for American Cities?''
I want to thank Mr. Turner for his presentation.
Mr. Turner. Mr. Chairman, with your consent, I would like
my opening statement to be included in the record.
Mr. Kucinich. Without objection, Mr. Turner's opening
statement will be included in the record.
I think that we have had a good discussion here, and we
will continue.
Gentlemen, thank you and thanks to everyone who has
participated in this hearing. The committee is adjourned.
[Whereupon, at 5:10 p.m., the subcommittee was adjourned.]
[The prepared statement of Hon. Bruce L. Braley and
additional information submitted for the hearing record
follows:]
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