January 8, 2001. Testimony delivered at the Public Hearing of the Empire State Development Corporation on the New York Stock Exchange Project Held Pursuant to the Eminent Domain Procedure Law, Alexander Hamilton United States Customs House.
James A. Parrott, Deputy Director and Chief Economist, Fiscal Policy Institute, testified:
My name is James Parrott and I am the Deputy Director and Chief Economist of the Fiscal Policy Institute (FPI). FPI was established in 1991 and is a nonpartisan, non-profit research and education organization that focuses on New York state and local fiscal and economic issues.
FPI tries to ensure that New York’s tax system is fair and that public expenditures are adequate to serve the needs of all New Yorkers. As part of our effort to promote fiscal responsibility, FPI seeks greater accountability to taxpayers from government in providing economic development subsidies to businesses. We believe that government plays an important role in facilitating a productive private economy capable of generating a shared prosperity.
In the case of the proposed subsidy of the New York Stock Exchange (NYSE), government has not established that it is absolutely necessary to subsidize the NYSE to such a tremendous extent. It appears that the City and State governments are prepared to provide the largest subsidy ever in New York State to a private entity, a subsidy of at least $940 million and possibly more ($480 for the construction of the trading floor, $160 million in tax and energy cost breaks, and $300 million to purchase the land, although it is reported that the land costs may reach $450 million). In fact, neither the City nor the State government has established that a public subsidy of any amount is warranted because it has not been established that the NYSE was at serious risk of leaving New York City.
Without having established that the NYSE was likely to leave, a public purpose is not clearly served by a subsidy to a private organization, and there is not a public purpose served by the Empire State Development Corporation acquiring the properties at issue in this hearing by exercise of its statutory power of eminent domain. If this project is effectively a private purpose, then the resort to eminent domain goes well beyond the original purpose of New York’s Eminent Domain Procedure Law.
It is undeniable that in recent decades shortsighted corporate decision-makers and public officials have fueled an unhealthy and counter-productive competition between government jurisdictions over the relocation of businesses and jobs. Officials at the Federal Reserve Bank of Minneapolis have argued that this “economic war among the states” is wasteful local public policy and results in the overall economy ending up “with less of both private and public goods than if such competition was prohibited.” To curb this “economic war among the states”, the Minneapolis Federal Reserve officials argue that Congress should impose sanctions such as taxing the full value of the subsidy or impounding federal funds payable to states engaging in such competition.
In the absence of Federal sanctions, states and localities cannot unilaterally disarm in this “economic war among the states”. Regional cooperation to stem costly business raiding has so far eluded us as evidenced by the failure of bi- and tri-state “no-poaching” pacts in the early and mid-1990s. (Although I think our public officials, and prominent private sector leaders, have failed us in not trying to be more creative in developing serious cooperative efforts to address regional transportation, environmental and other economic issues. The Port Authority of New York and New Jersey has a bi-state governance structure that should be used for exactly this purpose.)
However, even if this “economic war among the states” is intractable, government has an obligation to fight it as effectively, efficiently and as strategically as possible. With few exceptions, it does not appear that New York City and New York State have been waging this war with tremendous success. Success should be measured in terms of less costly subsidies, not more costly subsidies. Success should mean the need for fewer and fewer subsidies to corporations in a given industry, not subsidies to each and every major industry participant. New York’s approach should not be to try to “equalize” real estate-based costs with other jurisdictions; to do so is to stack the deck against itself from the start.
There is no doubt that the NYSE is an important, and probably essential, part of the City’s financial industry. The City and the State should be responsive to the legitimate infrastructure and economic development needs of the NYSE, as they should be in the case of all businesses small and large. But from the circumstances that are publicly known about the NYSE’s potential relocation outside of New York City, including the information made public by the City and the State, it is not evident that the NYSE would have left New York. Given the magnitude of taxpayer resources that have been committed to retaining the NYSE, this appears to be fiscally irresponsible and a highly questionable public policy.
One of the most puzzling aspects of the NYSE retention deal is that there would be a need for it at all after the City, and the State, have over the last 10 years or so, provided subsidy packages to most of the major securities firms that are members of the NYSE. If the NYSE is really so critical to the operation of New York’s financial markets, would the major NYSE member firms, who themselves are now committed to staying in New York City, allow the Exchange to leave New York?
This example is illustrative of the fact that the City and the State either are not acting very strategically, or just do not bargain very hard, when they deal with private companies that raise the specter of moving out. The result is that the City and the State end up subsidizing private companies for something they were going to do anyway at the expense of pressing public needs such as restoring library hours, improving our parks or school facilities, investing in our infrastructure, or promoting the construction of affordable housing.
The pending public subsidy to the NYSE highlights the need for a comprehensive re-examination of the process followed by the City and the State in considering and granting retention subsidies. To date, there has been relatively little public oversight of this process. Audits by the City and State Comptrollers have tended to focus on narrow aspects of retention deals involving compliance with job creation goals, and while these audits are important they have not taken up the core issue of substantiating the need for massive public subsidies. It is also surprising, considering the magnitudes of public resources involved, that the City’s budget oversight apparatus has not yet focused a spotlight on dealings in this area.
Taxpayers deserve some credible assurance that such subsidies are necessary, and need to know that public officials entering into such agreements are pursuing a strategy to minimize public costs as long as the “economic war among the states” drags on. And importantly, there should be more opportunities for members of the public to ask some hard questions and get more answers.
Alice Meaker, Director of Good Jobs New York, also testified:
Good afternoon. I’m Alice Meaker, and I direct Good Jobs New York, a good government project that promotes accountability to taxpayers in the use of economic development subsidies. Good Jobs New York is a joint project of the Fiscal Policy Institute and Good Jobs First. The Fiscal Policy Institute is a New York-based research and education organization that focuses on state and local tax, budget, economic and related public policy issues. Good Jobs First is a national clearinghouse tracking best practices in economic development. Good Jobs New York seeks to ensure that New York’s economic development practices are carried out effectively, responsibly, and with accountability to taxpayers. Toward this end we have documented the largest subsidies offered to New York City corporations in the name of economic development. Information on these subsidies is available on our website, at www.goodjobsny.org.
The proposed subsidy to the NYSE could cost taxpayers $1.1 billion. It would be the largest subsidy in state history, and it is a bad deal for New Yorkers. We take issue with the extent to which public resources and government authority are being used to facilitate the proposed development.
The State’s power of eminent domain is limited to cases involving public use, benefit or purpose. We do not think that a new trading floor for the NYSE fulfills this requirement. This proposed project will primarily benefit private interests. While New York State has used its power of eminent domain very liberally, other states have defined what constitutes a “public purpose” and some have precluded takings for private commercial development. The New York State Bar Association has called for reform of the State’s eminent domain procedures law, and two of the law’s co-authors have called for a review of what constitutes a “public purpose,” since the current definition is too broad and allows virtually any use.
The state and city say that the economic benefits of retaining the NYSE justify the massive public investment. But that justification rests on the assertion, which has never been demonstrated to the public, that the NYSE had made credible threats to move from Wall Street to a site outside New York. Unfortunately, there is a precedent in this city for retention deals to be made with companies whose executives later announce they never considered relocating. The governor and mayor owe it to taxpayers to demonstrate that we are not, yet again, being taken for a ride.
Why isn’t there more private sector investment in this new project? If keeping the NYSE in lower Manhattan is so critical to the strength of the city’s financial industry, shouldn’t its member firms be expected to invest in keeping it here? They can certainly afford it. The securities industry in New York City, which is dominated by NYSE member firms, paid out bonuses of nearly $12 billion in 1999. With a fraction of those bonuses, these firms could easily finance the new facility themselves.
NYSE executives claim they need larger, consolidated space with room to expand in order to compete globally. But the rapidly-evolving computerization of brokerage functions, and the much greater efficiency of electronic trading means the old-fashioned trading method that involves a “specialist” on a trading floor is quickly becoming obsolete. It is likely that NYSE, keeping up with these trends, will actually need less space, not more.
The use of subsidies for this project runs counter to the public benefit in several respects.
The opportunity costs of this subsidy are enormous. The $1.1 billion offered to the NYSE means that much less for investments in public education, transportation, affordable housing, and job training – investments that would benefit many more New York businesses and residents. Subsidies to NYSE and other large companies also mean more of the tax burden shifts onto smaller businesses.
This project is much too risky for the amount of public money at stake. The city has agreed to develop a trading floor for the NYSE with or without a developer and a major tenant for the office tower. No professional developer has been willing to take on this project without an anchor tenant. And with several large parcels of real estate coming onto the market in lower Manhattan, it may become increasingly difficult to identify an anchor tenant willing to take space above the NYSE. Without an anchor tenant, and with the economy continuing to slow, the Mayor has agreed to engage in a very risky speculative development project with hundreds of millions of taxpayer dollars at stake.
The lack of accountability to taxpayers reinforces public cynicism that government serves the powerful and connected, while ordinary people have no meaningful say, even when enormous public expenditures are at stake. Today’s hearing is one of very few opportunities for the public to have input into this proposed project. In fact, this hearing would not have happened at all but for the possibility that the land will be taken by condemnation. The closed-door process of distributing corporate subsidies fuels a growing sense of disenfranchisement, further mutes civic engagement and ultimately erodes our democratic institutions. Let’s honor Alexander Hamilton, after whom this building is named, and his commitment to democracy, fiscal prudence and good government. It’s time to open the doors on corporate subsidies and offer better accountability to the New Yorkers who pay for them.
Thank you for your consideration of our testimony.