[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
GAMING THE TAX CODE: PUBLIC SUBSIDIES, PRIVATE PROFITS, AND BIG LEAGUE 
                           SPORTS IN NEW YORK

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON DOMESTIC POLICY

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 18, 2008

                               __________

                           Serial No. 110-156

                               __________

Printed for the use of the Committee on Oversight and Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York             TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania      DAN BURTON, Indiana
CAROLYN B. MALONEY, New York         CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri              CHRIS CANNON, Utah
DIANE E. WATSON, California          JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts      MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York              DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky            KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa                LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of   PATRICK T. McHENRY, North Carolina
    Columbia                         VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota            BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland           JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
JACKIE SPEIER, California

                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
               Lawrence Halloran, Minority Staff Director

                    Subcommittee on Domestic Policy

                   DENNIS J. KUCINICH, Ohio, Chairman
ELIJAH E. CUMMINGS, Maryland         DARRELL E. ISSA, California
DIANE E. WATSON, California          DAN BURTON, Indiana
CHRISTOPHER S. MURPHY, Connecticut   CHRISTOPHER SHAYS, Connecticut
DANNY K. DAVIS, Illinois             JOHN L. MICA, Florida
JOHN F. TIERNEY, Massachusetts       MARK E. SOUDER, Indiana
BRIAN HIGGINS, New York              CHRIS CANNON, Utah
BRUCE L. BRALEY, Iowa                BRIAN P. BILBRAY, California
JACKIE SPEIER, California
                    Jaron R. Bourke, Staff Director



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 18, 2008...............................     1
Statement of:
    Brodsky, Assemblyman Richard L., 92nd Assembly District New 
      York State; Professor Clayton Gillette, New York University 
      School of Law; and Professor Brad R. Humphreys, Department 
      of Economics, University of Alberta........................    26
        Brodsky, Richard L.......................................    26
        Gillette, Clayton........................................    70
        Humphreys, Brad..........................................    85
    Larson, Stephen, Associate Chief Counsel, Financial 
      Institutions and Products, Internal Revenue Service........    12
Letters, statements, etc., submitted for the record by:
    Brodsky, Assemblyman Richard L., 92nd Assembly District New 
      York State, prepared statement of..........................    29
    Gillette, Professor Clayton, New York University School of 
      Law, prepared statement of.................................    73
    Humphreys, Professor Brad R., Department of Economics, 
      University of Alberta, prepared statement of...............    87
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio, prepared statement of...................     5
    Larson, Stephen, Associate Chief Counsel, Financial 
      Institutions and Products, Internal Revenue Service, 
      prepared statement of......................................    15


GAMING THE TAX CODE: PUBLIC SUBSIDIES, PRIVATE PROFITS, AND BIG LEAGUE 
                           SPORTS IN NEW YORK

                              ----------                              


                      THURSDAY, SEPTEMBER 18, 2008

                  House of Representatives,
                   Subcommittee on Domestic Policy,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m. in 
room 2154, Rayburn House Office Building, Hon. Dennis J. 
Kucinich (chairman of the subcommittee) presiding.
    Present: Representatives Kucinich, Cummings, Tierney, and 
Watson.
    Also present: Representative Weiner.
    Staff present: Jaron R. Bourke, staff director; Charles 
Honig and Noura Erakat, counsels; Jean Gosa, clerk; Charisma 
Williams, staff assistant; Leneal Scott, information systems 
manager; Larry Brady, minority senior investigator and policy 
advisor; Adam Fromm, minority professional staff member; and 
William O'Neill, minority senior professional staff member.
    Mr. Kucinich. The committee will come to order.
    We have a number of things going on on the Hill today. 
Members will be coming in and out, but we are going to start 
the hearing, in deference to our witnesses.
    The Domestic Policy Subcommittee of the Committee on 
Oversight and Government Reform will now come to order.
    We have been joined by the Honorable Congresswoman Diane 
Watson from California. Thank you, Ms. Watson.
    Now, without objection, the Chair and the ranking minority 
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 may have 5 
legislative days to submit a written statement or extraneous 
materials for the record.
    Without objection, at some point we will be joined on the 
dias by Representative Anthony Weiner, who has asked to 
participate in today's subcommittee hearing.
    The subject of our hearing today is: ``Gaming the Tax Code: 
Public Subsidies, Private Profits, and Big League Sports in New 
York.''
    I am Congressman Dennis Kucinich, the chairman of the 
Domestic Policy Subcommittee. This is our third hearing in the 
last year and a half on the Federal Government's subsidization 
of the construction of professional sports stadiums through the 
Federal Tax Code.
    In our previous hearings we showed that building sports 
stadiums does not make sense as a tool of taxpayer subsidized 
economic development. From a State and local perspective, 
sports stadiums do not create jobs and, in fact, they use 
resources that would be better expended elsewhere, such as on 
building schools and shoring up crumbling infrastructure.
    Rather, State and local governments compete with each other 
to lure or retain professional sports teams in a senseless race 
to the bottom for larger public subsidies subsidized by the 
Federal taxpayer.
    As a result, not only are other more important public 
safety projects ignored, such as repairing structurally 
deficient bridges and aging water distribution and treatment 
systems, but granting a Federal tax exemption to bonds issued 
to build these stadiums means more stadiums and more expensive 
stadiums are being built than if there were no Federal subsidy.
    Furthermore, stadiums are essentially private. Sports teams 
are privately owned by extremely wealthy individuals. The 
practice of providing taxpayer subsidies to the building of 
sports stadiums is a transfer of wealth from the many to the 
wealthy. This committee is charged with exposing waste, fraud, 
and abuse. In the case of the new Yankee Stadium, not only have 
we found waste and abuse of public dollars subsidizing a 
project that is for the exclusive benefit of a private entity, 
the Yankees, but also we have discovered serious questions 
about the accuracy of certain representations made by the city 
of New York to the Federal Government.
    This subcommittee's still ongoing investigation has 
uncovered substantial evidence of improprieties and possible 
fraud by the financial architects of the new Yankee Stadium. 
The stadium project has already benefited from the issuance of 
over $900 million of tax-exempt bonds. The tax exemption on 
these bonds will save the Yankees well over $100 million in 
interest cost, a subsidy that will cost Federal taxpayers 
almost $200 million in lost tax revenues.
    The city is now requesting that the IRS approve over $360 
million in additional bonds to allow the Yankees to complete 
this stadium. These additional bonds would make it the most 
costly publicly funded stadium in the United States and would 
make it even more exorbitant, all on the taxpayers' dime.
    At a minimum our investigation has shown that these bonds 
should not be approved without further investigation. Two 
wildly divergent valuations for the land under the stadium were 
submitted by the city and State government officials to the 
Federal Government.
    In July 2006 the New York City Department of Parks and 
Recreation submitted to the National Park Service an appraisal 
for $21 million. That is for a 10.7-acre portion of the 
McComb's Dam Park. That is D-A-M. This parcel constitutes the 
majority of the New Yankee Stadium site. State and Federal law 
require that the city replace the park, which was destroyed to 
build the stadium, with one of at least equivalent value. The 
park appraisal arrived at the $21 million figure based on a 
rate of $45 per square foot.
    While land appraisals are complex, the subcommittee has 
consulted with experts and has reached a provisional judgment 
that the park appraisal is, if not completely accurate, 
reasonably based on the comparable properties used to calculate 
value. At the same time, New York City Industrial Development 
Agency submitted to the Internal Revenue Service a $204 million 
assessment of the stadium site that was conducted by the city's 
Department of Finance for largely the same land. This figure 
appears to be wildly inflated. The assessment is based on a 
valuation of the land at $275 per square foot, a rate roughly 
six times the one used for the park appraisal, the one that 
appears to be without justification, according to principles of 
proper land valuation.
    It appears that the $275 rate was derived from comparison 
to assessments on much smaller lots. Smaller lots, as we 
understand, are generally worth more per square foot. Lots 
located in much more expensive neighborhoods in other boroughs 
such as Manhattanville and Alphabet City, both located in 
Manhattan. New Yankee Stadium is located, in contract, in the 
south Bronx.
    There is also substantial doubts to the $1 billion 
valuation of the stadium, itself, but here, too, it appears the 
city padded the assessment with questionable costs, including 
soft costs of $250 million, or 25 percent of stadium cost, 
which is high.
    These findings and conclusions are consistent with the 
preliminary finding of the investigation conducted by New York 
State Assemblyman Richard Brodsky, a witness at today's 
hearing.
    Finally, there is reason to question whether the projection 
of the tax assessments within the city's Development Agency 
provided to the IRS is based on an insupportable estimate of 
the future value of the stadium. Typically, sports stadiums 
lose some of their value over time as they become obsolete, a 
process that usually lasts less than 40 years, but the city 
makes the highly suspect claim that the stadium never 
depreciates. Rather, they assert that it gains 3 percent in the 
value a year through 2046. There is no decline in value 
projected.
    Taken together, the consequence of these three assertions 
is an inflated assessment figure that allows the city to claim 
that the payments will be made by the Yankees for debt service 
and known as payments in lieu of taxes. That would satisfy the 
Treasury regulation that the IRS applies in its consideration 
of whether this project is eligible for tax-exempt bonds.
    If the city properly assessed the value of the stadium site 
and the stadium, itself, most likely either a smaller stadium 
would have been built or the Yankees would have been forced to 
contribute a larger share of the cost of the project. The 
publicly financed share would have been smaller.
    So the question this subcommittee is investigating is 
whether the New York Yankees and New York city officials 
collaborated in a scheme to mislead the Internal Revenue 
Service in order to pass more of the cost of a fancy new 
stadium onto the Federal taxpayers.
    We had hoped that the representatives from the New York 
Yankees and New York City Industrial Development Agency, the 
key players arranging this deal, would have participated in 
this hearing and given us their perspective on the policy and 
factual issues. But they weren't available, and to accommodate 
their schedules we will hear from those witnesses at a later 
date.
    The assessment issues are complex and our inquiry is 
incomplete, in large part because the Yankees and the city have 
repeatedly failed to comply with our requests to produce 
documents about the assessments. But I anticipate that will 
change. We are going to continue our investigation.
    [The prepared statement of Hon. Dennis J. Kucinich 
follows:]

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    Mr. Kucinich. The Chair recognizes Congresswoman Watson.
    Ms. Watson. I want to thank the Chair for today's hearing. 
At a time when the economy has been turned upside down, our 
banks are failing, foreclosures are abounding, the whole globe 
is upset because in this country we have allowed the upper 
class to destroy the middle class, and so this hearing is very 
necessary to examine whether the use of Federal tax codes to 
help build professional sports stadiums and arenas is in the 
best interest of the public.
    The public wants to hear from us what are we going to do, 
and when we allow the rich to get richer--and certainly it is 
those who run sports organizations that are really reaping in 
the money.
    Now, we are today specifically focusing on the use of 
federally tax exempt bonds to finance the New York Yankees and 
the New York Mets Stadiums, and the new stadium being built for 
the New York Mets.
    The New York Yankees is valued at around $730 million. The 
New York Mets is valued somewhere around $482 million, and the 
New York Mets [sic] is valued at around $244 million. Looking 
at these numbers, I do not understand why these sports teams 
cannot fund the construction of their own stadiums and arenas. 
These are money-making facilities every time they are open. Why 
should the city have to do that?
    I hope this hearing today will shed light on this issue.
    An article that Forbes titled, ``How About Them Cowboys'' 
reported that the National Football League's average value of a 
franchise football team is nearly $1 billion. The owners of the 
Dallas Cowboys, and specifically Jerry Jones, owns the 
wealthiest franchise in the NFL and is currently building a $1 
billion stadium in Texas that is a mix of public and private 
financing. Jones is already a billionaire and is having his 
stadium built with $325 million in taxpayers' subsidies.
    How can we do that when people's savings are disappearing? 
How can we do that when we are paying for a war that is only 
taking our lives and our moneys and not giving anything back? 
How can we use $325 million of taxpayers' dollars?
    The reason why my city, the city of Los Angeles, does not 
have an NFL football team is because our local government, 
thanks to them, does not want to use public funds to finance a 
stadium, and for good reason. The sports industry makes enough 
capital to finance their own construction of their own 
facilities.
    Now, the Coliseum that they are looking at has next to it a 
school of science and industry, L.A. Unified School of Science 
and Industry. The parking is worth millions of dollars to keep 
that school open. They want the proceeds from the parking. They 
are not going to get them. I used to be on the board. I just 
want to make it real clear that at least our city council is 
smart enough not to give public money away to a franchise that 
makes more money than the whole board and the school district 
makes in a year.
    Mr. Chairman, I don't believe that the use of taxpayers' 
dollars and the Federal Tax Code should be used to subsidize 
the construction of stadiums and arenas. It is not in the best 
interest of the American people, and at this time we are 
looking at a stimulus package to go out to the public, because 
that middle class who pays taxes is being squeezed to the point 
of collapse, and I will not sit by and allow that to happen.
    Thank you for having this hearing today.
    Mr. Kucinich. I thank the gentlelady.
    We are joined by the gentleman from Massachusetts, Mr. 
Tierney. Mr. Tierney is recognized.
    Mr. Tierney. I don't have an opening statement, Mr. 
Chairman. I am interested in the questions and answers and 
thank our witnesses for being present and you for having the 
hearing.
    Mr. Kucinich. I thank the gentleman.
    We will continue by introducing our first panelist. Mr. 
Stephen Larson is the Associate Chief Counsel of Financial 
Institutions and Products of the Internal Revenue Service. 
Prior to this assignment, Mr. Larson served in the Office of 
Tax Policy at the Treasury Department, where he was Senior 
Advisor to the Assistant Secretary.
    Mr. Larson began his service with Treasury in early 2004 in 
the Office of General Counsel as Acting General Counsel from 
July through December 2006. Before joining the Treasury 
Department, Mr. Larson was vice president and general counsel 
of Special Projects for CSX Corp., where he worked for over 12 
years, and a partner at the Richmond, VA, firm of Christian and 
Barton specializing in corporate and financial matters.
    I want to thank Mr. Larson for appearing before the 
subcommittee today.
    I am going to note for the members of the subcommittee and 
for the public that while Mr. Larson is allowed to discuss IRS 
regulations, policies, and procedures, he is prohibited by 26 
U.S.C. 6301 from discussing, directly or indirectly, 
information submitted by any particular taxpayer to the IRS. I 
just want to go over that one more time so we can all 
understand the ground rules of his participation. He is allowed 
to discuss IRS regulations, policies, and procedures, but he is 
prohibited by 26 U.S.C. 6103 from discussing, directly or 
indirectly, information submitted by any particular taxpayer to 
the IRS.
    With that in mind, welcome. Mr. Larson, it is the policy of 
the Committee on Oversight and Government Reform to swear in 
all the witnesses before they testify.
    [Witness sworn.]
    Mr. Kucinich. Let the record reflect that the witness has 
answered in the affirmative.
    I would like Mr. Larson to give a brief summary of his 
testimony.
    Try to keep it to 5 minutes, but bear in mind your complete 
written statement will be included in the hearing record.
    Mr. Larson, you may proceed.

STATEMENT OF STEPHEN LARSON, ASSOCIATE CHIEF COUNSEL, FINANCIAL 
      INSTITUTIONS AND PRODUCTS, INTERNAL REVENUE SERVICE

    Mr. Larson. Good morning, Chairman Kucinich, members of the 
subcommittee. I appreciate the opportunity to be here this 
morning.
    My name is Steve Larson, and I am the Associate Chief 
Counsel, Financial Institutions and Products, with the Office 
of Chief Counsel of the IRS. The Office of Chief Counsel acts 
as the legal advisor to the IRS Commissioner on matters related 
to the Internal Revenue laws and other legal matters. My 
division, Financial Institutions and Products, includes those 
lawyers with primary responsibility for tax-exempt bonds.
    As a preliminary matter, I want to thank the chairman for 
his reference to Section 6103 of the Code. As you know, 
confidentiality of taxpayer information is critically important 
to the IRS.
    With that caveat, I will be happy to provide whatever 
information I can.
    Mr. Chairman, tax-exempt bonds have always been an 
important source of financing for State and local governments. 
Over time, Congress has limited the ability of State and local 
governments to use that tax exemption to subsidize private 
business activities. Currently, a so-called qualified private 
activity bond is entitled a tax exemption only if the proceeds 
from the bonds are used for limited purposes specified by 
statute.
    In contrast, Congress has not placed similar restrictions 
on the use of proceeds of bonds payable from general 
governmental funds. In this context, general governmental funds 
include the proceeds of generally applicable taxes. It is this 
definition of generally applicable taxes and the payments made 
in lieu of those taxes that is the subject of both the existing 
and proposed regulations and is a key area of interest to this 
subcommittee.
    The Office of Chief Counsel tries to interpret and 
administer the laws with respect to tax-exempt bonds fairly and 
equitably and tries to ensure that the exemption is used in 
ways that are consistent with prevailing law, the statutes, and 
congressional intent.
    In that context, we were asked in July 2006 to review plans 
for two new sports stadiums to be funded in part by tax-exempt 
bonds, secured by fixed payments in lieu of taxes. Based upon 
the regulations in effect at that time, we issued two private 
letter rulings that allowed the plans outlined by those 
taxpayers to go forward.
    However, those private letter rulings served to focus our 
attention on how broadly the existing regulations could be 
interpreted with respect to PILOTs. To address these concerns 
in October 2006 the Treasury Department and IRS published 
proposed regulations to tighten the standard for determining 
when PILOTs would be treated as commensurate with generally 
applicable taxes. The basic purposes of these proposed 
regulations is to require a closer structural relationship 
between eligible PILOT payments and generally applicable taxes.
    Under the proposed regulations, a payment would be 
commensurate only if it is based on the amount of generally 
applicable real estate taxes that would otherwise apply to the 
property. This would also require that the PILOT payments be 
based on normal assessments using the same process as similar 
property subject to real property taxes. Downward adjustments 
would be permitted, but the net amounts would continue to 
fluctuate with changes in that hypothetical real estate tax. 
Accordingly, the proposed regulations would eliminate the 
ability of a State or local government to set PILOTs at a fixed 
amount that did not fluctuate with changes in the underlying 
tax.
    The proposed regulations are on the recently released 2008-
2009 Priority Guidance Plan, and we hope to issue a final 
regulation soon.
    I thank you for this opportunity to appear this morning and 
will answer any questions that you may have.
    [The prepared statement of Mr. Larson follows:]

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    Mr. Kucinich. I thank Mr. Larson.
    Sir, broadly speaking, do you generally verify factual 
recitations made in applications to the IRS for private letter 
rulings?
    Mr. Larson. As we recite as a regular basis in the actual 
responses to private letter rulings, the Chief Counsel's Office 
is effectively just a large law firm. We have no audit 
function, and so we specifically advise taxpayers that we have 
relied upon their statements, that we have not verified their 
statements, although the facts are subject to later 
verification. But we do not, ourselves, verify it.
    I will say that in my experience it is extremely common, if 
facts in a PLR are just confusing, don't seem to make sense, 
would seem out of whack based on just the general knowledge of 
the examiner, we will frequently ask for clarifications. But at 
the end of the day----
    Mr. Kucinich. So there is a followup? If it doesn't make 
sense, you followup?
    Mr. Larson. Yes. During the PLR process if it does not make 
sense we will ask for clarification and ask for further 
information.
    Mr. Kucinich. Do you ever ask people to basically affirm or 
swear that the information they are presenting is true?
    Mr. Larson. They actually, all of it is submitted to us 
under penalties of perjury, and so we don't ask them anything 
beyond that, but they do submit everything under penalties of 
perjury. Most of the questions, frankly, tend to be in the 
nature of clarification. The examiner will look at it and say I 
just don't understand what you are really doing here. Can you 
tell me some more?
    Mr. Kucinich. Again, broadly speaking, after a private 
letter ruling has been issued, how would or could the IRS come 
to suspect that factual recitations that were made to support a 
private letter ruling might be false? And what procedures would 
be followed to investigate suspicions of factual inaccuracies?
    Mr. Larson. The process for verifying factual assertions 
would come up in the course of an audit of the underlying tax-
exempt bonds, and the Chief Counsel's office, as I say, 
functions as a law firm. We do not perform the audit function. 
We have no investigatory staff, but the IRS audit side does and 
is actively involved in that process, and there are a 
substantial number of auditors who are assigned specifically to 
tax-exempt bonds.
    Mr. Kucinich. Well, let's say that someone gave you factual 
recitations to obtain a private letter ruling from an applicant 
seeking tax-exempt treatment for bonds. What would be the 
consequences if the IRS ultimately concluded that these factual 
recitations that were the basis of you making a private letter 
ruling in order to get tax-exempt bonds were false? What would 
happen?
    Mr. Larson. Again--and, of course, we are speaking broadly 
about the process--if the IRS examiners were to find that facts 
that had been given to obtain the PLR were false, that would 
become part of their audit findings. It would depend, of 
course, whether the falsity of those facts was material. Would 
it have changed the result had we known what the correct facts 
were? But assuming that they were material, the PLR, the 
private letter ruling, is only valid to the extent that it is 
based on accurate factual recitation. So if the audit team were 
to determine that the underlying representations were false, 
then the PLR would no longer be effective and the audit team 
would pursue its normal recourse.
    Mr. Kucinich. What happens if someone makes false 
representations to the IRS on matters of material import with 
respect to the information that you need in order to make a 
ruling?
    Mr. Larson. As I said, the factual information we receive 
is submitted under penalties of perjury. What happens with 
respect to the person making that is really a matter of 
criminal law and is outside of my area.
    Mr. Kucinich. I thank the gentleman.
    Ms. Watson.
    Ms. Watson. Thank you, Mr. Chairman.
    Mr. Larson, can you explain for us how the requirement that 
a PILOT be designated for a public purpose is interpreted under 
Federal law?
    Mr. Larson. Yes. The way that the tax-exempt bonds are 
structured, there is a bifurcation between private activity 
bonds, to take us back a step, there was a time when a State or 
locality could issue bonds and allow the proceeds to be used by 
private industry, anybody they wanted to.
    Ms. Watson. There was a time.
    Mr. Larson. There was.
    Ms. Watson. Do they still have that provision?
    Mr. Larson. That has been pared back very substantially, so 
that is now true only for a limited class of things that are 
limited by statute.
    I think the answer to your question is that, in the context 
of true governmental bonds--that is, bonds that a municipality 
or a State is paying from its own resources--the language about 
for a public purpose is designed really to just differentiate 
between the types of bonds that are for a private purpose and 
those that are public. So really that language is taken to mean 
that a governmental entity has decided that it is willing to 
spend its own money on the project, if it does. If a State or 
locality says this is something I am willing to spend the money 
on, it really is a matter of federally. We are not in a 
position to second-guess them as to whether that was a wise use 
of the funds.
    Ms. Watson. Well, is it fair to say that the PILOT need not 
be designated for a Federal public purpose?
    Mr. Larson. That is a fair statement. We have no Federal 
public purpose standard in this area. It is simply a matter of 
looking through to the State and locality for what it views to 
be a public purpose right now.
    Ms. Watson. In your testimony you state that the public 
purpose of the proposed regulations was to modify the standards 
for the treatment of PILOT as generally applicable taxes to 
better assure a reasonable close relationship between eligible 
PILOT payments and generally applicable taxes. How do the 
proposed regulations and their changes in the commensurate 
standards specifically advance this goal?
    Mr. Larson. Madam Congresswoman, they advance it directly 
in this way: that the generally applicable tax that we really 
are talking about mostly in connection with bonds is real 
property tax. It is the normal real estate tax that 
municipalities and States apply to property in their 
jurisdictions. What the new proposed regulations would do when 
they went into effect would be to require that a PILOT be 
structured in almost identically the same way that true actual 
real estate taxes are structured.
    It could not be just a fixed flat fee; it would have to be 
an amount that starts with the tax rate applied to other 
property that is based on assessments that are made in the same 
way as other property in the area of a similar type, and, in 
particular, coming at it from the other side, would make it 
clear that it cannot be calculated using debt service as the 
base.
    Ms. Watson. In proposing changes to the PILOT rule, did IRS 
consider whether a PILOT structured in a way that meets the 
proposed regulations be viable in today's bond market?
    Mr. Larson. By today's bond market I am not sure anyone 
knows what could be viable. To speak more broadly to what we 
thought at that time and what we hope are more normal sorts of 
markets, we are certainly not experts in the marketing of 
bonds. That is why there is public comment.
    Ms. Watson. You don't have to be an expert on marketing 
bonds, but look at Wall Street today. We are talking about some 
projects near Wall Street in New York that makes me very, very 
nervous to have taxpayers' money put into the construction of 
those PILOT projects.
    I think that you have responded in such a way that adds to 
more questions, so I will just give back my time, Mr. Chairman.
    Mr. Kucinich. I thank the gentlelady.
    We are going to just have one more round of questioning of 
Mr. Larson. For those who just tuned in, we speak of PILOTs, 
and we are not talking about people who fly planes. We are 
talking about tax schemes that may not fly, and it is payment 
in lieu of taxes.
    I always like to remind the staff that here in acronym 
city, D.C., it is good to explain terms.
    Mr. Larson, the proposed PILOT regulations add new 
requirements that the payment must be based on the current 
assessed value of the property for each year in which the 
PILOTs are paid, and that the assessed value must be determined 
in the same manner and the same frequency as property subject 
to generally applicable taxes.
    To what extent were those requirements implicit in the 
current payment in lieu of taxes rule?
    Mr. Larson. They would have been implicit only in a very 
indirect sense in that the existing regulations do require that 
a PILOT not exceed the amount that would have been paid under 
the normal real estate taxes in effect. So presumably it would 
only really be at the time of a challenge. Only if someone were 
challenging the validity of a payment would there be a need to 
actually go in and do the appraisal and calculate that 
hypothetical tax. It may be that municipalities would have done 
that, but there was nothing in either the regulations or 
implicit in those regulations that would have required it more 
frequently.
    Mr. Kucinich. In your testimony you state that the basic 
purpose of the proposed regulations was to modify the standards 
for the treatment of payment in lieu of taxes as generally 
applicable taxes to better assure a reasonably close 
relationship between eligible payment in lieu of tax payments 
and generally applicable taxes. How do the proposed 
regulations, changes in the commensurate standard, specifically 
advance this goal?
    Mr. Larson. They advance this goal by requiring that a 
PILOT, to qualify under the proposed regulations, really must 
be calculated in essentially the same way that true real estate 
taxes would be calculated; that is, that you must look at the 
appraised value, you must apply a rate, and, as with a true 
real estate tax, the municipality is entitled to permit a form 
of tax abatement, but that abatement has to be either a 
percentage or a fixed amount off the top. It will still have to 
leave the amount fluctuating with changes in the underlying 
taxes and the appraisal.
    Mr. Kucinich. Is there anything in the payment in lieu of 
taxes rule or the proposed regulations that is designed to 
ensure that the process by which a payment in lieu of taxes is 
approved at the State and local level is democratically 
accountable and transparent? Broadly speaking, do you generally 
verify factual recitations made in applications to the IRS for 
private letter rulings?
    Mr. Larson. I think there are two elements, as I understood 
your question. I think, as I had testified earlier, we are not 
in a position to really verify factual recitations, although we 
do question ones that seem to be facially questionable. We do 
not have any rules and would not view ourselves as having the 
authority to question the procedure by which a State or local 
government made the decision to spend generally applicable tax 
revenues on a particular project.
    So, unlike the private bonds where there are hearing 
requirements and we do have procedures, if you are talking 
about a governmental bond, which are the bonds that we are 
talking about here in this hearing, we do not. We leave that to 
the State and local government and the elected officials in 
those areas.
    Mr. Kucinich. You know, if, for example, a factual 
recitation was made with respect to, let's say, the value of 
land, turned out to be wildly disparate, is that something that 
the IRS takes notice of if that valuation of the land was 
substantive enough in the issuing of a private letter ruling?
    Mr. Larson. I think, here again, we are getting to a point 
that, given what is in the papers recently, we have a fact 
pattern that is awfully closely tailored.
    Mr. Kucinich. I will withdraw it.
    Mr. Larson. I believe I can answer it more broadly. I mean, 
the IRS does read the papers, it does look at things that are 
publicly known. The auditors get their information from 
whatever credible sources are available.
    Mr. Kucinich. Thank you. What factors do the IRS and the 
Treasury Department typically take into consideration when 
choosing an effective date for tax regulations?
    Mr. Larson. I suspect, Mr. Chairman, this is very much like 
the same source of concerns that Congress takes into effect 
when it chooses effective dates. We issue thousands of 
regulations covering large numbers of situations, and so we 
make a real effort to try to be fair and equitable. We look at 
expectations of the people being affected. We look at what is 
fair. So when you get down to questions of effective dates that 
are prospective, retroactive, these are all factors that we 
take into account, but there is no set answer.
    Mr. Kucinich. I thank the gentleman.
    We have been joined by the gentleman from Maryland, Mr. 
Cummings. Welcome.
    Does Ms. Watson have any other questions on this round 
before we go to Mr. Cummings?
    Ms. Watson. Just a comment, because I come from Los Angeles 
and the State of California, we have Prop 13, and we have been 
arguing for decades now to split the role because commercial 
facilities and sites maintain, whereas the assessed valuation 
was based on 1976, and so that fluctuates. And so we have some 
complications, so I guess this would be an issue that we would 
really have to raise locally in State issue about the tax 
because of our own propositions and the way they control the 
assessed valuation of property.
    Mr. Larson. I believe you are right, Congresswoman.
    Ms. Watson. I am trying to weed through all this, and it 
really gets complicated with the laws that we pass.
    Mr. Larson. Right. And the proposed regulation would simply 
say that for a PILOT to be effective and usable, it would have 
to fit within that same regime.
    Ms. Watson. Conform. Yes.
    Mr. Larson. Right.
    Ms. Watson. Thank you.
    Mr. Kucinich. I thank the gentlelady.
    The Chair recognizes the gentleman from Maryland, Mr. 
Cummings.
    Mr. Cummings. Mr. Chairman, I will just wait until the next 
panel.
    Mr. Kucinich. I thank you, Mr. Cummings.
    Thank you, Mr. Larson, for your presence here. I am 
grateful for it.
    We are now going to move on to our next panel.
    We are fortunate to have an outstanding group of witnesses 
on our second panel.
    Mr. Richard Brodsky represents the 92nd Assembly District 
of the State of New York. Assemblyman Brodsky serves as 
chairman of the Committee on Corporations, Authorities, and 
Commissions of the New York State Assembly, which oversees the 
State's public and private corporations. This includes 
jurisdiction over business corporation law and 
telecommunications, as well as all public authorities, such as 
the MTA, the Throughway Authority, the Public Service 
Commission, the Port Authority, and the Lower Manhattan 
Development Corp.
    From 1993 until 2002 Assemblyman Brodsky served as chairman 
of the Committee on Environmental Conservation, and prior to 
this as chairman of the Committee on Oversight, Analysis, and 
Investigation.
    Assemblyman Brodsky is the recipient of numerous awards 
from local groups for his dedication to public interest and 
legislative achievements.
    Welcome, Assemblyman Brodsky.
    We will also hear from Professor Clayton Gillette. 
Professor Gillette joined the New York University School of Law 
faculty in 2000. For the prior 8 years he was the Perre Bowen 
professor of law at the University of Virginia School of Law. 
Professor Gillette began teaching at Boston University School 
of Law, where he served as the school's associate dean and the 
Warren scholar of municipal law.
    Professor Gillette's scholarship focuses on commercial law 
and local government law. He is the co-author of several case 
books, including Local Government Law, Payment Systems and 
Credit Instruments, and a textbook on Municipal Debt Finance 
Law.
    Professor Gillette has also written numerous articles on 
topics including long-term commercial contracts, relations 
between localities and their neighbors, and the privatization 
of municipal services.
    Finally, Mr. Brad Humphreys. Professor Humphreys is an 
associate professor in the Department of Economics at the 
University of Alberta, where he also serves as their chair in 
the Economics of Gaming. Professor Humphreys conducts research 
for the Alberta Gaming Research Institute. Before joining the 
faculty at the University of Alberta, he was an associate 
professor at the University of Illinois Urbana-Champaign and 
had spent 10 years on the faculty of the University of Maryland 
Baltimore County in the Department of Economics.
    Professor Humphreys' research areas include the economics 
of sports and sport finance. He has written about the economic 
impact of professional sports teams and has co-authored the 
paper ``Caught Stealing: Debunking the Economic Case for D.C. 
Baseball,'' which was published by the Cato Institute. The 
professor also co-edited ``The Business of Sports'' published 
earlier this year.
    Professor Humphreys is co-editor of Contemporary Economic 
Policy and associate editor of the International Journal of 
Sport Finance.
    Gentlemen, it is the policy of the Committee on Oversight 
and Government Reform to swear in all witnesses before they 
testify. I would ask that you rise and raise your right hands.
    [Witnesses sworn.]
    Mr. Kucinich. Let the record show that the witnesses have 
answered in the affirmative.
    As with the first panel, I ask that each witness do their 
best to give an oral summary of your testimony, and try to keep 
it under 5 minutes in duration. I am not here with a hammer to 
enforce that, but give it a try. I just want you to know that 
your entire statement will be placed in the record of this 
hearing.
    The reason why we try to keep these statements short is 
that the statements that we get we read beforehand, and the 
Members have questions that will help elucidate some of the 
issues that you bring to the committee.
    Assemblyman Brodsky, thank you for being here. We would 
like to start with you. You may proceed with your statement. 
Thank you, sir.

  STATEMENTS OF ASSEMBLYMAN RICHARD L. BRODSKY, 92ND ASSEMBLY 
 DISTRICT NEW YORK STATE; PROFESSOR CLAYTON GILLETTE, NEW YORK 
  UNIVERSITY SCHOOL OF LAW; AND PROFESSOR BRAD R. HUMPHREYS, 
         DEPARTMENT OF ECONOMICS, UNIVERSITY OF ALBERTA

                STATEMENT OF RICHARD L. BRODSKY

    Mr. Brodsky. Thank you, Mr. Chairman and members of the 
subcommittee. I am pleased to be able to transmit to you today 
a full copy of the committee report on the decision by New York 
City to subsidize the new Yankee Stadium. The report is based 
on previously secret and undisclosed documents, sworn testimony 
before committees of the legislature, and direct discussion 
with involved public and private persons. It sets for the 
action of New York city officials and others in the achievement 
of a package of public benefits to the New York Yankees 
totaling about $1 billion.
    The report concludes that, in spite of public claims by 
elected officials and the Yankees, there are almost no new 
permanent jobs created, no new economic activity in the 
impacted communities. The bonds we use for private benefit, the 
public is paying the cost of repayment of those bonds and of 
construction of the stadium. Massive ticket prices announced by 
the Yankees were never a concern of the public officials who 
set forth the public conditions for the subsidies, and instead 
of dealing with that issue, city officials used bond proceeds 
to purchase a luxury suite at Yankee Stadium, itself.
    In spite of State law requirements that there be a 
measurable public benefit in exchange for these massive public 
subsidies, such benefits do not exist. The tax system was 
manipulated in order to make the deal financially viable.
    I will be glad to answer specific questions on these 
matters of State concern to the extent you wish me to do that. 
They are outlined at length and the documentary evidence behind 
them are cited at length in the interim report.
    There is a growing national consensus that public financing 
of private sports facilities serves no useful public purpose. 
The New York City model is whatever additional proof needs to 
be offered behind that assertion. Whatever the emotional and 
political benefits of sports facilities, there is no public 
benefit that has been put forward in the process of approval.
    There is a second concern about the specific proposed 
regulation, IRS regulation. Let me note one caveat. I come from 
a State that sends to Washington, DC, about $80 billion more 
than it gets back. The only supportable reason for this given 
in New York and elsewhere is that anything that addresses the 
imbalance of payments is in New York's interest. That is not a 
trivial argument, but, given that the benefits here are not 
flowing to the public but to a wealthy private corporation 
headquartered in Ohio and to people who don't live in New York, 
my objections to the deal stands, notwithstanding my concern 
about the balance of payment issues.
    The IRS regulation will deal with a fundamental fact 
dealing with the explosion of public debt around the Nation. It 
is not being done by elected officials; it is being done by 
off-book entities such as public authorities, local development 
corporations, things not under the normal control of elected 
officials and not normally subject to debt restrictions of a 
kind that others have. That is not good public policy and 
should stop.
    The third Federal concern has to do with specific evidence 
uncovered in our investigation with respect to the private 
letter ruling issued by the IRS. The IRS questioned the city. 
The city swore that the property would be handled as would any 
other taxable property in the city of New York in the same 
class. The statements making those representations are included 
in my testimony and in the report.
    In the end that is not what happened. The city inflated the 
value of the land underneath the stadium and the stadium 
facility, itself, for reasons that I can suspect but can't yet 
prove. The bottom line is that on the land value, while the 
surrounding area is assessed $9, $20, $30 and $40 per square 
foot, the land under Yankee Stadium is assessed at $275 a 
square foot. The procedures they used to come to this inflated 
conclusion include not dealing with comparables in the same 
county; accepting unverified numbers; calculating the site at 
17 acres, although it was only 14.5 acres; failure to adjust, 
as professional and legal requirements are, for changes in 
value; and, most damning, the city did two separate assessments 
for different Federal and State purposes.
    In order to assure that the park land under Yankee Stadium 
which was being taken from the community would be replaced by 
park land of equal value, the city was required to do an 
assessment. Instead of telling them about the $204 million 
number, which would have required $204 of park land back in, 
they did another assessment and came in at $21 to $28 million, 
depending on how you read it.
    The second appraisal was done based on a State requirement 
of a statute I wrote. That came in at $40 million.
    Where the city had an economic interest in a lower 
appraisal, it went out and found that; where there was an 
apparent interest in a higher appraisal, it found a way to get 
that done.
    One final observation. This whole mess is the consequence 
of a fundamental flaw in Federal policy. Put aside the 
chairman's questions to the IRS about whether they ever 
independently verified whether there was a valid public purpose 
to the tax expenditures through the tax exemption process. We 
have created a system, the Congress and the administration have 
created a system that pits States against each other. That is 
marked by an elegant blackmail by powerful economic interests 
who threaten to leave.
    There is no national interest in having the Government of 
the State of New York gleefully announce that he has persuaded 
by the use of taxpayer money a company to leave Maryland or 
Ohio or California and come to New York. That is a net no-gain 
for the national economic interest. Yet, that very pirating and 
blackmail is the consequence of the unmitigated subsidies in 
these sorts of deals.
    I urge the Congress to finally end that and to no longer 
permit the tax exemption policies of the national government to 
be used as ways to whip-saw States into lowering their taxes 
for special, private, and usually powerful interests.
    Thank you very much for this opportunity to present the 
interim report and our findings to the committee. I will be 
glad to answer any questions you may have.
    [The prepared statement of Mr. Brodsky follows:]

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    Mr. Kucinich. Thank you very much, Assemblyman Brodsky.
    Professor Gillette, you may proceed.

                 STATEMENT OF CLAYTON GILLETTE

    Mr. Gillette. Thank you, Mr. Chairman and committee 
members, for the privilege of testifying before you today. My 
summary remarks this morning are intended to suggest the proper 
scope of the tax exemption should be tied to fostering 
democratic accountability and financial transparency at the 
local level. The use of PILOTs, at least as structured in the 
Yankee Stadium deal, does not readily meet that test.
    Any analysis of the proper scope of the tax exemption must 
begin with the proposition that the exemption constitutes a 
subsidy from the Federal Government to the entity that benefits 
from the proceeds of the debt. There are two circumstances 
under which a Federal subsidy to projects initiated by State or 
local governments is appropriate. The first involves projects 
that are positive external effects; that is, projects that 
return benefits beyond the jurisdiction that utilizes the 
funds.
    The second category of projects that warrant Federal 
subsidy encompasses those that enhance the autonomy of local 
governments generally. Autonomous localities can experiment 
with government projects that, if successful, can be copied 
elsewhere, can encourage an efficient sorting of local public 
goods, and can confer broader social benefits by attracting a 
tax base that will be more productive in the attracting 
locality than in alternatives.
    If the purpose of the exemption is to enhance local 
economy, however, it is crucial that the subsidy be used in a 
manner that actually reflects local preferences rather than 
simply deals between local officials and groups that have 
disproportionate access to the local decisionmaking process.
    Current Federal tax law maps on to this template closely. 
First, it provides a relatively broad exemption for bonds 
issued that will have projects of multi-jurisdictional effects. 
In addition, Federal law permits the exemption to be used to 
foster local conceptions of the ideal mix of public goods, 
but--and this is an important condition--Federal tax law 
contains a variety of provisions that can best be understood as 
imposing on a locality the obligation to ensure that the 
decision to undertake a subsidized project does, in fact, 
reflect the preferences of local residents.
    For instance, locality may take advantage of the Federal 
subsidy, even for a sports stadium, if it is willing to finance 
the stadium from municipal revenues that have been generated by 
the traditional taxing mechanism used by the city to fund the 
public goods and services that it provides, what are referred 
to in the Treasury Department regulations as generally 
applicable taxes.
    Expenditures made through this process are likely to have 
been subjected to an appropriations competition for scarce 
resources in the municipal budget that ensures transparency, 
monitoring of the municipal budget by taxpayers, and therefore 
an outcome that is likely to reflect expenditures that 
constituents actually prefer.
    Even qualified private activity bonds that are eligible for 
the tax exemption include requirements that enhance 
transparency and democratic accountability in the local 
decisionmaking process. For instance, most forms of private 
activity bonds are subject to a volume cap imposed on 
jurisdictions. The volume cap serves as an effective substitute 
for the benefits of the budgetary process by creating 
competition for projects that are eligible for tax-exempt 
financing.
    Finally, a private activity bond is not eligible for the 
Federal exemption unless the governmental issuer approves the 
bond after a public hearing following reasonable public notice 
or through a voter referendum.
    Now, how do payments in lieu of taxes [PILOTs], fit into 
this scheme? The answer to that question, I submit, affects the 
difficult inquiry into the conditions on which PILOTs should 
qualify as generally applicable taxes rather than private 
payments, since PILOTs have characteristics of both.
    In resolving this ambiguity about the proper 
characterization of PILOTs, I submit it is useful to consider 
how they fit with the issues of transparency and democratic 
accountability that I have argued pervade generally applicable 
taxes and other features of Federal exemption. PILOTs may lack 
transparency and susceptibility to monitoring, at least to the 
extent that they are treated in municipal budgets differently 
than taxes, are dedicated to particular payments rather than 
paid into the local treasury appropriated in the same manner as 
other expenditures, or are treated as contract revenues to be 
transferred or disposed of through a process that varies from 
and is less observable than appropriations from a fixed budget.
    For instance, the mayor of the city of New York has taken 
the position that PILOTs constitute contractual rights that 
have been individually negotiated by the city rather than tax 
payments, and, as such, the mayor's offices claim that PILOTs 
are not revenues of the city susceptible to payments to the 
general fund controlled by the City Council; instead, they are 
arguably, in his view, assignable to city projects within the 
discretion of the mayor.
    Indeed, the difficulties related to monitoring the use of 
pilots are exacerbated to the extent that PILOTs are deemed by 
applicable taxes, so that the bonds they secure qualify as 
governmental bonds rather than private activity bonds. Under 
those circumstances, failure to treat PILOTs in the same manner 
as tax revenues paid into and appropriated from the municipal 
treasury through the normal budgetary process means that the 
bonds that they secure will not be scrutinized through the 
monitoring process that typically applies to municipal 
revenues.
    On the other hand, because these bonds are not private 
activity bonds, they are also not subject to the alternative 
means of assuring transparency and monitoring, such as volume 
cap and the public approval requirements. In short, at least to 
the extent that PILOTs are treated differently from taxes, they 
permit evasion of the democratic scrutiny that ensures that 
federally tax-exempt projects and financing structures reflect 
constituent preferences and serve the objectives of local 
autonomy.
    None of this is to say that the use of PILOTs to finance 
local projects is illegitimate. If the State or locality 
believes the PILOTs are desirable, that jurisdiction should be 
perfectly free to employ that structure. But nothing about the 
fact that PILOTs are useful from a local perspective requires 
that the Federal Government allow use of a Federal tax subsidy 
to support it. Indeed, it is plausible that by disadvantaging 
opacity in public finance, Federal tax law can actually provide 
useful incentives for the reform of an anachronistic procedures 
in State and local finance.
    My thanks for your time and attention. I would be pleased 
to answer any questions you might have.
    [The prepared statement of Mr. Gillette follows:]

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    Mr. Kucinich. I thank you Professor Gillette.
    Professor Humphreys, you may proceed. Thank you.

                  STATEMENT OF BRAD HUMPHREYS

    Mr. Humphreys. Thank you very much, Mr. Chairman and the 
rest of the committee members that are here.
    The first point I want to address is to put this PILOT 
decision in a broader public policy perspective, and this 
addresses some of the points that were made by Assemblyman 
Brodsky just a moment ago.
    When you look at the whole deal, at the bottom of it the 
idea was that the Yankees and the Mets were given this kind of 
special treatment because they threatened to leave New York. 
From an economic perspective, the important part about that is 
that the reason that is a credible threat is that major league 
baseball enjoys an explicit antitrust exemption granted by 
Congress. That, I think, is the root cause of this problem.
    If you are going to look somewhere about addressing this 
problem, the antitrust exemption is the place to start, because 
that is why Congresswoman Watson doesn't have a National 
Football League team in her District for the last decade or 
more; it is because you have to get to the anti-trust exemption 
if you are going to reduce the leverage that teams have over 
State and local governments.
    So another important part about this is that the Yankees 
have raised their prices significantly, and I want to address 
how significantly. Clearly, baseball teams charge a lot of 
different prices--$10, $12, $15--different price levels, and 
teams that move into new stadiums clearly raise their prices. 
But it is hard to assess how much they raise their prices by 
because of the many different prices they can raise.
    The important part I think about the Yankees case is that 
at the top end their price increases are exceptional, a 600 
percent increase in the price of the highest ticket that they 
are offering. That is off the scale compared to the last 30 
years of price increases that we have seen in major league 
baseball when teams move into new stadiums.
    At the average, it is also very, very large. It is four 
times the average increase of a team moving into a new stadium. 
That is a lot of price increases.
    Now, the Yankees have claimed that they are holding the 
price of the bleacher tickets the same, and that is somehow 
good for the average fan. Well, what they have announced is 
that the full season ticket price of bleacher tickets is the 
same, so if you buy 81 tickets for the bleachers you can get 
them for $12. We don't know what the bleacher price is going to 
be for walk-up sales, which is what is appropriate for looking 
at the average baseball fan.
    So those are exceptional price increases.
    Next I want to talk about the effective consequences of 
this PILOT ruling for stadium financing. The Yankees get to 
build their stadium using tax-exempt bonds, which carry a lower 
interest rate. That reduces their interest cost.
    The way the Congress intended the 1986 Tax Reform Act to 
work was if you are a State and local government you are going 
to finance your stadium through tax-exempt bonds. You must use 
general tax revenues to finance the principal and interest 
funds.
    So State and local government, elected officials, are 
responsible to the taxpayers and voters by keeping the budget 
in line, and that provided a sort of Governor on the size of 
any spending on stadium projects.
    Well, what effectively the PILOT decision does is it 
removes any of those sort of limits on spending on stadium 
projects because you would no longer have to worry about how 
the principal and interest payments are going to fit into your 
budget if you are a State and local politician. You got the 
money from the Yankees, so issue all the debt you want and let 
the Yankees build the largest and the most expensive stadium 
ever built in the history of major league baseball.
    Look at what happened to the Nationals just a few years 
ago. Their stadium cost about $600 million. The Yankees' 
Stadium is costing twice that.
    What is one of the reasons that it is costing twice that? 
Well, because they get issued these tax-exempt bonds.
    Finally If you look at the documentation surrounding the 
whole PILOT decision, again and again we see that one of the 
rationales for granting the Yankees this benefit was the 
economic benefits that are going to be generated to the 
community from the new stadium. The primary issue there is all 
these construction jobs that are generated building this new 
stadium.
    Well, there is a tremendous amount of scholarly evidence 
and peer reviewed academic journals that says there are such 
new benefits associated with stadium construction projects. 
Just because you look at the new stadium being built in New 
York and see a lot of construction jobs there, that doesn't 
mean that those condition jobs are new economic benefit to the 
community. In fact, the evidence is that it is not. Those are 
just construction jobs that would have been undertaken 
somewhere else in New York that didn't get built because of the 
Yankee Stadium.
    So we can't conclude, just because there is a couple of 
thousand construction jobs created to build the stadium, that 
is really new benefit to the community.
    So, in summary, I would say that the important point of the 
hearing is: let's don't have special benefits given to the 
Yankees. I would say there is a larger public policy issue 
here: let's don't have special benefits given to major league 
baseball in the form of an explicit anti-trust exemption, but 
let's examine both issues.
    Thank you. I will take your questions now.
    [The prepared statement of Mr. Humphreys follows:]

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    Mr. Kucinich. Thank you, Professor Humphreys.
    I would like to start with Assemblyman Brodsky. It is clear 
from your report that you believe the city's sole rationale for 
deviating from the State's uniform tax exemption policy was the 
threat that, absent public financing, the Yankees would depart 
New York City. It is also clear you don't believe that the city 
has provided any real evidence of the Yankees actually making 
such a threat to the city.
    On the other hand, you acknowledge the Yankees operate as a 
virtual monopoly under antitrust laws. Many economists have 
pointed to this status as a key to understanding why sports 
franchises extract such lucrative deals from cities.
    Is it possible, Assemblyman, that even if the Yankees never 
made an explicit threat to the city, it was an ever-present 
backdrop to the negotiations with the city for a stadium deal?
    Mr. Brodsky. Mr. Chairman, let me, if I may, mildly correct 
the question. This report has nothing in it about my beliefs. 
What this report has is evidence adduced after review of 
documents. I would like to share with you my beliefs, but that 
is not what is in the report.
    In the report there is evidence that the city stated as a 
matter of law that the sole reason for giving the benefits was 
the threat to leave, so that whatever the policy questions are, 
that was stated as the reason.
    The evidence we uncovered shows that such a threat was not 
made, and when asked under oath, the head of the IDA sort of 
conceded that he didn't know if, when, and how such a threat 
was made.
    To the extent that it was in the ether, in the background, 
and was something that the city had to sort of be worried about 
without an explicit threat, it seems to me that when you are 
negotiating a billion dollars worth of goodies you ought to 
have more than the other.
    Second of all, for that to be a real threat there had to be 
a place for them to go. Given the timing of this deal, if they 
were going to leave were they going to go to Jersey? They had 
said publicly they would not do that.
    So the evidentiary basis for what we uncovered is that 
there was no such threat, and that if it had been made it was 
not credible.
    Well, we are playing chicken a little bit here because no 
leader of the city of New York wants to be the public person 
responsible for losing the Yankees, and in that case I would 
simply suggest that there was a public process to test it. They 
had an obligation to tell the truth and they did not.
    Mr. Kucinich. Professor Humphreys, would you comment on 
that, because this is in line with your testimony?
    Mr. Humphreys. Yes. I would love to.
    I think that, whether or not somebody would testify under 
oath that there was a threat made, the threat is always there. 
Because the League operates as a monopoly, we know from 
economic theory that monopolists reduce output in order to 
extract monopoly rent. In this context, reducing output means 
that they have fewer teams than they would if we didn't have 
the antitrust exemption, so that means that there are viable 
markets open somewhere.
    I will point out that in the 1970's when Yankee Stadium was 
being renovated, I believe the Yankees played a whole season 
outside of Yankee Stadium in Connecticut. Just because they 
said they weren't moving to New Jersey doesn't mean that they 
were----
    Mr. Brodsky. Shea.
    Mr. Humphreys. Was it in Shea? But just because they said 
they wouldn't move to New Jersey, that doesn't mean that there 
was not other viable markets that they could move into. So I 
think it is a credible threat, even if it is implicit.
    Mr. Kucinich. Professor Gillette, when the Industrial 
Development Agency and the city decided to issue $900 million 
worth of bonds for the Yankee Stadium project, or an additional 
$360 million of bonds to complete the project, what is the full 
range of potential cost, economic and otherwise, facing the 
city?
    Mr. Gillette. I'm sorry. Let me make sure I understand your 
question, Mr. Chairman. What are the implications?
    Mr. Kucinich. Let's suppose that we conclude that the 
assessment of Yankee Stadium was improperly inflated by New 
York City and, in fact, the stadium is not worth $1.2 billion, 
but is closer to $900 million. Can you explain the possible 
consequences if this were established, including economic 
consequences for the city and the bondholders and the potential 
legal liability for other parties in the bond offering?
    Mr. Gillette. Certainly.
    Mr. Kucinich. And after you conclude, I would like Mr. 
Brodsky to comment on this, as well.
    Mr. Gillette. Then I think that, again, when we are 
speaking hypothetically, but there could be extraordinarily 
serious consequences for the city of New York.
    First of all, I take under circumstances Mr. Larson said 
today if it turns out that the representations were inaccurate 
than the PLR would not necessarily be effective, and the 
Internal Revenue Service would have the ability to declare 
those bonds taxable.
    If those bonds were, in fact, taxable, then bondholders who 
purchased them on the belief that the interest they received 
was tax exempt are going to be, shall I say, mildly upset. 
Either the city will have to step up and pay to the IRS the 
lost revenue to the Federal Government, which I believe you 
classified this morning as somewhere around $200 million. The 
city would have to step up to that to avoid the imposing of 
additional tax liability on the bondholders. Or, if the 
bondholders do face that liability, one would assume that they 
are going to make claims against the city.
    If, in fact, what you are suggesting is that there may have 
been some knowing misrepresentations, then I take it the city, 
along with other participants in the bond process--but you 
asked primarily about the city--would be subject to liability 
under the anti-fraud provisions of the 1934 Securities Act. I 
am not a securities lawyer, but my understanding certainly is 
that a municipal corporation is a person for purposes of 
section 10(b) of the 1934 Securities Act and for purposes of 
liability under that provision.
    Mr. Kucinich. You know, as we go to Assemblyman Brodsky for 
a response, and then we will go to Mr. Cummings after Mr. 
Brodsky replies, this question I think is properly framed 
through your testimony of the wildly disparate price per square 
foot of the land.
    You testified that on the one hand the land was assessed at 
$275 per square foot, and on the other hand the second 
appraisal by the Park Service was----
    Mr. Brodsky. The gross numbers are easier.
    Mr. Kucinich. Twenty-one.
    Mr. Brodsky. It is $21 million versus $204 million.
    Mr. Kucinich. So, in light of what Professor Gillette said, 
what are the implications here?
    Mr. Brodsky. Well, the implications, first, as Professor 
Gillette said, has to do with the telling of truth in both the 
State process and the Federal process. It would have an 
implication for the National Park Service and the State law 
requirement for replacement of park land. But the most profound 
effect would be as to whether or not the revenues generated 
from the PILOTs would be sufficient to pay the debt service on 
the tax-exempt or taxable bonds.
    Assume you needed $50 million a year in debt service, at 
the new assessed value the PILOTs would only generate $35 
million. You have a $15 million shortfall with respect to 
payment of debt service.
    Mr. Kucinich. And who would have to make that up?
    Mr. Brodsky. That would be a matter for the courts to 
determine as between a series of wronged persons. The 
interesting question here is what constitutes the violation of 
a promise to the IRS. As was cited in the report in my 
testimony, the city specifically said that it would assess the 
property as would any other property of the city be assessed. 
That did not happen.
    The consequences of that are first a matter for the IRS. I 
admire the unwillingness of the IRS to comment publicly on a 
specific taxpayer's issues. That is the correct policy. Having 
said that, I don't know what it takes to get their attention. I 
think that is going to come out in the wash as the IRS reviews, 
apparently, the newspaper reports.
    Mr. Kucinich. I want to thank the gentlemen.
    We are going to go to a second round of questioning, but I 
want to defer now to my colleague, Mr. Cummings, for questions.
    Thank you, Mr. Cummings.
    Mr. Cummings. First of all, I want to thank all of you for 
your testimony.
    Assemblyman Brodsky, in Baltimore when we built the 
stadiums, we built two stadiums almost simultaneously, the 
Ravens and the Orioles, but when Orioles Stadium came around 
there was this belief that what you said, there was a lot of 
competition in other places and that we might lose the Orioles. 
It was a genuine concern.
    I am trying to figure out, you seem to think that was a key 
in all of this; is that right? In other words, that possibly 
you might lose?
    Mr. Brodsky. No, my view is what we did was we established 
that was the legal reason the city of New York gave, even 
though it could not substantiate it.
    Mr. Cummings. I got you. And so you don't believe that to 
be true?
    Mr. Brodsky. I don't know, but I do know that the 
obligation of the public officials in charge of the public fisc 
is to check it out. I do know that Mr. Steinbrenner had at some 
point said they would not leave. Whether they would leave and 
the New York Mets would leave and there would be no sports 
teams in New York, I believe that would be a political 
impossibility and I believe this is a political question, as 
well.
    Mr. Cummings. Probably would go crazy.
    Mr. Brodsky. You know, we are just a few country lawyers up 
there, but we know enough to protect the interest of our 
people, and there are condemnation remedies if someone tries to 
take a partnership out of the city or the State. There are lots 
of things to do. We shouldn't have to get there. In the end, my 
only point is that, although the law requires public economic 
benefits in exchange for public subsidies, that did not happen, 
and the mere conjecture about leaving is not enough as a matter 
of policy or of law to justify a billion dollars of public 
money.
    Mr. Cummings. It seems as if people rally around. I 
remember when we were dealing with the Baltimore deal, the 
Orioles, I swear, I was trying to figure out what benefit was 
coming to the city. I mean, I couldn't figure it out. It seemed 
like everything was going to the owners, so I kind of concluded 
that this was a rah-rah kind of thing. In other words, let's do 
it for the good of the city; that is, having a cohesive 
element.
    You know, there is not a lot to bring people together, but 
teams seem to be able to do that. It was attractive for 
tourists, maybe, when they come in. Maybe. I see you shaking 
your head. Why are you shaking your head?
    Mr. Humphreys. I lived in Baltimore for 17 years.
    Mr. Cummings. Good. So you know what I am talking about.
    Mr. Humphreys. I do exactly. Yes. Your point is exactly 
right. The benefit is all intangible, according to the research 
evidence. It is a sense of community, and it allows people like 
me and you to bond about the Orioles or something like that.
    Mr. Cummings. Right.
    Mr. Humphreys. Which other things in society can't do.
    Mr. Cummings. Right.
    Mr. Humphreys. The tangible economic benefits associated 
with tourism are not there, even if they are claimed. So I 
think you are exactly right about where the benefits are.
    Mr. Brodsky. If I may, Congressman, there is nothing like 
professional sports to make public people nutty.
    Mr. Cummings. To make public people what?
    Mr. Brodsky. Nutty.
    Mr. Cummings. OK.
    Mr. Brodsky. If you will recall the introduction by Justice 
Blackman in his decision on the Curt Flood case, unlike any 
case I have ever read, the entire first portion is a recitation 
of who his favorite baseball players are. Now, this was a 
distinguished jurist and a figure of national legal repute. 
When you start talking about sports in the context of 
government, you have finally found something that we as public 
officials don't have to force on the public and say be 
interested. They care.
    Mr. Cummings. Yes.
    Mr. Brodsky. That level, I think, of political and voter 
interest makes us do things we would do for no other enterprise 
in our society.
    Mr. Cummings. Are you all of the opinion that there should 
not be this kind of tax favoritism when it comes to teams?
    Mr. Brodsky. Yes.
    Mr. Cummings. All of you? I mean, do you see any reason why 
we should have this type of situation where folk can take 
advantage of this tax exemption?
    Mr. Gillette. Congressman, I want to be a little more 
reluctant than my colleagues on the dais up here and say it 
depends on who the we is. That is, if a particular municipality 
or municipal officials going through a process that reflects 
the true preferences of their constituents decides that, the 
absence of economic benefits notwithstanding, the kinds of more 
ephemeral benefits that Assemblyman Brodsky and Professor 
Humphreys are referring to, warrant a particular use of public 
money, then I, a fan of local autonomy, say that is just fine. 
But that public money should be the municipalities' public 
money if it is a municipal decision.
    So if we mean by we is the municipality actually 
internalizing all the economic effects of its decision, I have 
less difficulty, even though I might disagree.
    What I do disagree with is the notion that simply because a 
municipality says we believe, as local residents, that this is 
in our local interest, that necessarily entails the use of a 
Federal tax exemption so that non-residents of that 
municipality are required to subsidize the local decision.
    Again, I am a huge fan of local autonomy. I think for that 
reason it is appropriate for the Federal tax exemption to be 
available in many cases to foster local decisions, but I see 
nothing in our federalism, certainly nothing Constitutionally 
that says that, simply because a locality has decided to pursue 
a particular project, it has a call on the Federal Treasury as 
well as the municipal treasury.
    Mr. Cummings. Yes.
    Mr. Brodsky. What he said.
    Mr. Humphreys. And I think that your question, sir, is: 
should we allow tax-exempt bonds to be used to finance these 
projects. Now, that means that there is a subsidy coming from 
every U.S. taxpayer, and I think that is inappropriate, because 
you are asking the entire country to subsidize the individual 
preferences of whatever the municipality is to build their 
palace of a sports stadium. That is bad policy, any way you 
look at it.
    As Professor Gillette has pointed out, it should be the 
locals who should pay, because they are the ones that are 
getting the benefit from it. So if we are talking about Federal 
tax dollars, I don't see any justification for it whatsoever.
    Mr. Cummings. I guess the other thing, as I close, 
Professor Gillette, you have to have, even in the scenario you 
just gave, there is something called integrity that you have to 
have there. I think sometimes there is some smoke being blown 
all over the place, and when the smoke clears maybe, just 
maybe, the folks are believing that there may be some benefit 
other than the rah-rah effect, and what you all are saying is 
rarely--and I am just curious.
    Do you know of any situations where you think it was 
appropriate? In other words, where there was integrity with 
regard to what the taxpayers were getting out of it, and that--
because I noticed a lot of promises are made up front, and then 
after a while you don't see a thing. Sometimes you see a loss. 
So I'm just wondering, do you all see any situations now that 
exist in your research?
    Mr. Brodsky. Well, in my earlier direct testimony, 
Congressman, I did point out that New York exports revenues to 
the Federal Government to the tune of about $80 billion a year.
    Mr. Cummings. Right. I heard that.
    Mr. Brodsky. And there is an argument that says anything 
that keeps the money back in New York is a good thing. So to 
the extent we exclude the context, the revenue export context, 
and ask the simple question you asked, which is, is there any 
benefit that you see from these public expenditures, my answer 
is no, I do not.
    Mr. Humphreys. I think there have been instances where 
taxpayers got their fair share. Those have been these instances 
where there was a referendum, it was on an increase in local 
taxes to pay for stadium improvements. They passed that 
referendum and they used the money. Green Bay is a classic 
example of this. The residents of Green Bay voted themselves a 
tax increase that was about $1,000 a year in order to renovate 
Lambeau Field. I think that is a clear expression of local 
interest, and they were willing to pay through higher taxes, 
and they got a renovated Lambeau Field.
    Those instances are few and far between, though.
    Mr. Cummings. Thank you, Mr. Chairman.
    Mr. Gillette. May I just add? I would agree. I think, 
Congressman, that the way to ensure what you are referring to 
as integrity is through physical transparency at the local 
level, so that if what are being used are taxes that go through 
the normal budgetary appropriations process of the 
municipality, as Professor Humphreys referred to, there I think 
you have the greatest likelihood that the expenditure is going 
to be monitored by local residents to ensure that the 
expenditure is made in a manner consistent with local 
preferences.
    The problem with PILOTs is they are not necessarily 
funneled through that appropriations process. They may, as in 
the case of Yankee Stadium, be treated as off-budget, 
essentially tax expenditures, where they are far less 
susceptible to monitoring, and therefore it is by no means 
clear that the expenditure reflects what residents really want 
done with tax dollars or with the opportunity cost for tax 
dollars.
    Mr. Kucinich. I think, Professor Gillette, when you talk 
about transparency--Assemblyman Brodsky, maybe you can shed 
some light on this--do you know, in your inquiry, how the New 
York City Department of Finance came up with the $275 per 
square foot amount and who actually did the assessment?
    Mr. Brodsky. Yes. We met, after reviewing documents, 
directly with Department of Finance personnel. The seven 
elements of this assessment are listed in my direct testimony. 
Without going over all of those, when we raised with them the 
question of why they didn't take comparables in the Bronx, why 
they took them in Manhattan, when we raised with them the 
failure to adjust for lot size and location, they literally 
fell silent. I mean, I would say, Well, why did you not do 
that, and they literally sat there.
    There is a substantial question about the manipulation of 
land assessments on the New York City assessment roles that 
this issue illuminates. There is a related development right 
near the stadium called the Bronx Terminal Market. It is being 
done by a very large and powerful developer in New York City 
who has an interest in a lower per square foot land value. That 
land value was calculated, two blocks from the stadium, at $9 a 
square foot. Where there was a city interest in a higher per 
foot value, again, just the land, the city assessed it at $275.
    Mr. Kucinich. I am going to go back to questioning 
Professor Gillette, but what my colleague, Ms. Watson, said 
earlier, you look at what is going on and the turmoil that is 
hitting Wall Street right now, which at the center of it is 
that the value of securities and securitized instruments was 
grossly inflated. This is what the whole subprime lending thing 
is about. And so it appears from your testimony, Assemblyman 
Brodsky, as you state, there are much broader questions 
reflected here, although in this particular case the disparity 
between $275 per square foot and $45 per square foot requires 
this subcommittee to not rest until the silence is broken. So I 
thank you.
    I want to ask Professor Gillette, New York City and New 
York State have argued that the Treasury Department's proposal 
to revise the PILOT rule unfairly discriminates against the 
city and State because it effectively prohibits the use of 
PILOTs, the one financing mechanism available for New York to 
finance tax-exempt bonds in New York. First, can you explain 
why, as you understand it, New York cannot finance tax-exempt 
bonds in the same manner as the District of Columbia, that is, 
from the proceeds of a tax imposed on its citizens specifically 
to finance stadium bonds?
    Mr. Gillette. My understanding is that New York State has a 
Constitutional provision that requires all local debt 
essentially to be what is called faith and credit or general 
obligation debt, so that New York City cannot funnel off 
particular revenues and dedicate them to a bonded project.
    Other States do not have this kind of limitation, and 
therefore have greater flexibility with respect to their 
financing opportunities.
    Mr. Kucinich. So what is your reaction to this argument 
that the Federal Government should design its regulations to 
take into account particular features of New York laws? Do you 
think that this is a sound principle routed in federalism?
    Mr. Gillette. My guess is federalism actually cuts just the 
other way. I mean, federalism suggests that States ought to 
have opportunities to design their governmental structures any 
way they want. We don't need cookie cutter State Constitutions. 
Different States can experiment with different restrictions and 
different allowances for their State governments.
    But what federalism entails is you have to take the good 
with the bad. If you want the opportunity to fashion your 
governmental structures in a way that is free of control of 
Federal Government, then every once in a while you may be 
disadvantaged by that governmental structure.
    If New York State or the residents of New York State were 
to determine that, in fact, the disadvantage of not being able 
to utilize certain Federal opportunities or federally created 
opportunities was so great, then New York State, the good 
residents of New York State have the opportunity to amend the 
Constitution, which is exactly what they have done in the past, 
for instance, with respect to allowances for what is called tax 
increment financing, TIF financing, which my understanding is I 
believe would not have been allowed but for a particular 
Constitutional amendment.
    Mr. Kucinich. Well, Professor, you have heard the IRS 
testify here today that the fact that a State treats PILOTS for 
certain purposes as if they are not taxes would be a legitimate 
consideration whether the IRS views the PILOT as a generally 
applicable tax. Are you aware of any way in which New York law 
treats the type of PILOTS used in the Yankee and Mets deals as 
non-tax revenues?
    Mr. Gillette. As non-tax?
    Mr. Kucinich. Right.
    Mr. Gillette. It is not clear to me how New York State 
treats these PILOTs. It certainly seems that the Office of the 
Mayor has made a claim that they are not tax revenues and 
therefore can be expended through a process other than the 
normal process that would apply to, for instance, property 
taxes.
    Mr. Kucinich. Thank you.
    Professor Humphreys, how do you respond to the argument 
that demand is the ultimate check on a team hiking ticket 
prices? Under one version of this theory, because the new 
stadium is roughly the same size as the old one, the supply has 
remained the same. Thus, the only way the team could raise 
ticket prices is to capture increased demand for the enhanced 
experience at the new stadium. What is wrong with this 
analysis?
    Mr. Humphreys. Well, the consumer's willingness to pay is 
ultimately the cap or the limit on what the Yankees are able to 
charge for tickets. Right? So there is some truth in that 
statement that the demand does limit this. But the Yankees are 
not competing with anybody.
    Mr. Kucinich. Well, should we care if the Yankees raise 
ticket prices exponentially for good seats if there is still a 
sizable minority of affordable seats available for less-wealthy 
fans or if the games are still available on TV?
    Mr. Humphreys. Well, I think we should. I think we should 
because of the consumer surplus that is out there. Right? So 
there are many, many fans----
    Mr. Kucinich. Do you want to elaborate on that?
    Mr. Humphreys. Sure. Think about some of your constituents 
who are Cleveland Browns fans and they buy Browns tickets and 
they pay whatever the value is of those tickets, but their 
value that they place on the experience probably is much higher 
probably than what they have to pay because of the place the 
Browns hold in the community. Right? So there is a tremendous 
amount of consumer surplus that gets generated by professional 
sports. That is enjoyment that you don't have to pay for.
    So the Yankees are able to capture a lot of that consumer 
surplus--that is the internalized benefit that people get from 
that--by raising their prices for what is essentially the same 
product. It is watching a Yankees game. That reduces welfare to 
consumers, the sort of total benefit that consumers get from 
consuming this product. So that makes the community worse off 
if a private enterprise like the Yankees is able to capture 
more of that consumer surplus through the act of changing 
prices. So it has economic consequences, and they are 
important.
    Mr. Kucinich. You testified as to the amount of the ticket 
price increases. Did you quantify that?
    Mr. Humphreys. Yes, I did.
    Mr. Kucinich. Can you again? Let's talk in terms that fans 
relate to.
    Mr. Humphreys. Sure. The average price increase of a 
baseball team that moved into a new stadium over the last 30 
years was about 20 percent. Right? The Yankees' average price 
increase is 139 percent, so it is many, many times. Baseball 
fans would expect to pay higher ticket prices when a team moves 
into a new stadium, but that is an extraordinary increase, well 
above--you have to look very hard to find any evidence of a 
team moving into a new stadium that increased prices by 
anywhere close to this amount in the last 30 years in baseball.
    Mr. Kucinich. Now, how do you put that in the context of 
the fact that, according to reports and according to 
information this subcommittee has, that city officials will 
have a luxury box available to them?
    Mr. Humphreys. Well, this is part of the dirty little 
secret of the economics of these stadium deals. As part of the 
negotiation, if you are going to provide a brand new stadium 
with publicly subsidized money for a team, that is very common 
in these lease deals for the local officials to get access to a 
lot of free tickets. And if you look at the lease deals for 
both the new Yankees and Mets Stadiums, they are getting a lot 
of tickets and they are getting luxury boxes. These are not 
like, well, we have some bleacher tickets left over, we are 
going to give them to you so you can use them. It is a very 
valuable service that they are getting for free.
    Mr. Kucinich. I don't know if staff has this information, 
or maybe one of the people who testified does. Do city 
officials who have access to this luxury box, do they pay for 
these tickets at the market value of the tickets so that they 
just have access to it and they are paying for it, or are--Mr. 
Brodsky.
    Mr. Brodsky. The luxury suite is purchased with the 
proceeds of the bonds. The city officials, themselves, pay 
nothing.
    Mr. Kucinich. Are there any ethics laws in the State of New 
York with respect to what kind of a benefit somebody can----
    Mr. Brodsky. It depends on whose money it is. If that is 
city money, which the city says it isn't, then it is city money 
for the city officials. That is OK. If it is private money, 
which the city says it isn't, then the private money is buying 
a benefit for the city officials. It is extraordinarily 
complicated, and I think----
    Mr. Kucinich. Does the outcome of the IRS ruling have a 
bearing on this?
    Mr. Brodsky. No, because these bond proceeds are from the 
taxable bonds. It is a question of whose money it is. It goes 
to your question about whether PILOT is a tax payment or 
something else. For the purpose of the exemption, it is a tax 
payment; for the purpose of these things, it isn't. So what 
this needs is a forensic accountant and somebody who wants to 
apply the law fairly to everybody.
    I didn't get any pleasure out of this mess, but the fact of 
it is that when you examine the details of the economic and 
legal relationships they stink, and somebody has to start 
saying there is no public interest in this that can be measured 
or was measured by the people who made the decision. It was 
done in secret, and it was done in ways that benefited them and 
not the public at large.
    Mr. Kucinich. But along those lines, you know, we are both 
in politics. You sound like you have some connection that is 
close to your constituency. How do people respond to it when 
they understand that New York city officials will be able to go 
to games for free while the rest of the Yankees fans are going 
to pay--what's the percentage increase?
    Mr. Humphreys. It is 600 percent at the top, 139 or 140 
percent on average.
    Mr. Kucinich. OK, from 140 percent to 600 percent increase. 
How do people relate to that?
    Mr. Brodsky. Well, the reactions I have seen, including in 
electronic media, is, Oh, there they go again. I have a great 
belief in the virtue and integrity of public service, but this 
kind of stuff kills it.
    Mr. Kucinich. Yes. OK, Professor Humphreys, I want to go 
back to this idea of the ticket prices. What do you say to the 
argument that if the market will bear higher ticket prices it 
is because the stadium-goers are benefiting from this enhanced 
experience and are willing to pay more money for that, and by 
definition the market is guaranteeing the optimum utility given 
the full stadium experience?
    Mr. Humphreys. Well, I would say that the market would 
guarantee that if there was competition. All these sort of nice 
properties of markets and prices efficiently or in a good 
economic sense allocating scarce resources like tickets to 
Yankees games, that all works if there is competition, and in 
particular if there is some viable substitute, some close 
substitute or some other producer that is able to sort of curb 
the tendency of monopolists to raise prices.
    I mean, we certainly know from economic theory that 
monopolists raise prices. That is why utilities are regulated. 
And it is not outside of the purview of public economic policy 
to regulate prices charged by other monopolists.
    Mr. Kucinich. Right. I just have a final question here, and 
that is, given your expertise, can you explain how cities who 
build stadiums for teams typically deal with stadium naming 
rights? I have always been mystified at how cities can make a 
rather enormous investment of tax dollars, whether it is local, 
State, or Federal, into these facilities and then have somebody 
else come along and put their name on it. How do these cities 
who build these stadiums deal with naming rights, and, to the 
extent the teams are typically granted these rights, how much 
are these rights worth and why are cities willing to grant them 
to teams?
    Mr. Humphreys. Well, the details of naming rights are 
hashed out in the negotiation between the teams and the cities 
when they are building the facilities. The teams always have 
the upper hand in that negotiation for reasons we have talked 
about through the course of this hearing. But you can always 
threaten to move. There is all sorts of reasons that teams have 
this power in negotiating. So they hash those things out, and 
it is, I think, a sort of low-cost concession that a city or 
local government can make to a team. OK, we will give you the 
naming rights, even though they are incredibly valuable. That 
is one of the reasons that it is often given to the team.
    Now, it is not always given to the team. There are 
instances where cities have retained the right to name the 
stadium or have control over the name of the stadium, so I 
wouldn't say it is always given away, but it is basically 
because of the power the teams have in these negotiations that 
awards them that. And it is incredibly lucrative. It is tens or 
hundreds of millions of dollars for these naming rights deals.
    The Atlantic Yards case in New York is a classic example. A 
bank paid almost $200 million for the naming rights of that 
facility.
    Mr. Brodsky. Congressman, you might want to look at the 
related activities of the Yankees and the city in selling off 
the salvage assets of the stadium.
    Mr. Kucinich. Selling off what?
    Mr. Brodsky. The salvage rights to the seats. I am told, 
for example, that the Yankees are now, instead of replacing 
bases on the first inning and fifth inning, are replacing them 
much more regularly and selling them as memorabilia at $800 a 
pop. Now, whose property that is is something the committee, my 
committee, is currently looking at. But you can go on to the 
selling channel on TV and buy yourself a foul pole and buy 
yourself some of the dirt from Yankee Stadium, and the bases, 
$800 a pop.
    Mr. Kucinich. Thank you. As this committee's work 
continues, the price of dirt at Yankee Stadium may go up. I 
want to advise the witnesses that this subcommittee is going to 
continue its work, that we expect at a hearing in the not-too-
distant future to have invited guests from the city of New York 
Finance Department and from the New York Yankees. It may be in 
October, which has generally been a good month for the Yankees.
    I want to thank you for your presence here. You have 
contributed greatly to helping to improve the understanding of 
these issues. I particularly want to thank Mr. Brodsky, because 
your report is something that members of this committee should 
have the opportunity to read in full, and I am certainly going 
to transmit your testimony, as well as the others individually, 
to the members of the committee so that they have a chance to 
review it, because these are serious national policy issues 
which the witnesses have raised.
    We are grateful to you, Assemblyman Brodsky, Professor 
Gillette, Professor Humphreys, for testifying.
    This has been a hearing of the Subcommittee on Domestic 
Policy of the Oversight and Government Reform Committee. The 
topic of today's hearing: ``Gaming the Tax Code: Public 
Subsidies, Private Profits, and Big League Sports in New 
York.''
    I want to thank all the witnesses. This committee stands 
adjourned.
    [Whereupon, at 11:50 a.m., the subcommittee was adjourned.]

                                 
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