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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/index.html

http://www.oversight.house.gov

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

JACKIE SPEIER, California

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

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

DIANE E. WATSON, California

CHRISTOPHER S. MURPHY, Connecticut

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

BRIAN HIGGINS, New York

BRUCE L. BRALEY, Iowa

JACKIE SPEIER, California

DARRELL E. ISSA, California

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

CHRIS CANNON, Utah

BRIAN P. BILBRAY, California

JARON R. BOURKE, Staff Director

(III)

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

(1)

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 conVerDate 11-MAY-2000 12:14 Jun 01, 2009 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 U:\DOCS\49621.TXT KATIE PsN: KATIE
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struction 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 taxexempt 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.

3

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.

4

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

12

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

13

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.

14

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 underlyVerDate 11-MAY-2000 12:14 Jun 01, 2009 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 U:\DOCS\49621.TXT KATIE PsN: KATIE
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ing 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

22

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

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ble 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 quesVerDate 11-MAY-2000 12:14 Jun 01, 2009 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 U:\DOCS\49621.TXT KATIE PsN: KATIE
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tions 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.

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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.

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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

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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.

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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

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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

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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 fiVerDate 11-MAY-2000 12:14 Jun 01, 2009 Jkt 000000 PO 00000 Frm 00089 Fmt 6633 Sfmt 6633 U:\DOCS\49621.TXT KATIE PsN: KATIE
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nance 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.

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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 antifraud 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

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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?

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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.

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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.

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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

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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.

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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—

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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.

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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

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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.’’

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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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