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Wednesday, November 9, 2011

Frank Farance on Why Roosevelt Island Finances, Elections and RIRA Matter

Below is a guest post from former Roosevelt Island Residents Association (RIRA) President and current Planning Committee Chair Frank Farance.

Why All This Matters

To some residents, RIRA sounds like intramural squabbling: cranky residents with strong personalities fighting over petty stuff. However, there are some topics of real and long- term consequence that affect all residents. One topic is the long-term finances of the Island. Roosevelt Island was built in the 1970's with hundreds of millions in bonds. I've heard that as much as $400 million is due, of which RIOC's "profits" will pay it down.

In other parts of the State, benefits from taxes, etc. flow from multiple sources, e.g., curbs and road repair from the village, parks from the township, traffic lights and sewage from the county, and major highways from the State and Federal governments. For geographically isolated Roosevelt Island, it seemed convenient to consolidate the money flows into a single State budget line item and to dispense them through the single agency RIOC. It was convenient until the Pataki administration took aim at Roosevelt Island and, with a single pen stroke, knocked out the money flow. Circa 1995, we went from $6 million annual "subsidy" to zero dollars quickly. The word "subsidy" was a contentious term because Roosevelt Island, a much smaller community then, didn't have the revenues to sustain itself.

What happened over the next half decade was: significant lapses in capital spending (e.g., seawall in need of serious repair), several attempts to reduce operating costs (e.g., eliminate third shift of Tram), increases in public safety fees (gets more revenue to RIOC), a sell-off of the Island parks and other land to raise money (Southtown, Octagon), a refusal to accept monies (e.g., seawall and Blackwell House repair), and so on. So one can imagine the frustration of Island residents back then. Circa 2005, as Pataki's gift to State Senator Olga Mendez who switched to the Republican Party, we now have the requirement that 5 of the 9 members of the RIOC Board must be Island residents, which allows our voices to be heard better.

However, we are still making bad financial decisions, regardless of resident or "elected" resident involvement on the RIOC Board. In summary, we had a $6 million negative cash flow in 1995 and twenty years later (according to RIOC's budget) we're back to a $6-8 million negative cash flow if Southtown 7-9 are not built, and we run out of cash around 2020. Negative cashflow, out of money, $400 million debt -- Not Good.

What has paid for the high spending in the past handful of years is the lump sum payments (soon they will be exhausted). Octagon made an $11 million lump sum ground lease payment, which translates to $48,000 per year ($4,000/month) contribution to the Island's operations (excludes the $110,000 annual payment for extra red bus service), i.e., Octagon building's several hundred market rate units pay less than one apartment's rent for all of RIOC's services. Ditto for Southtown 1 and 2 and their low contributions. Ditto for Southtown 3-6, whose contributions are now lower than originally forecast. Please understand, this is not any criticism of Octagon and Southtown residents (who had nothing to do with this), this is a criticism of the RIOC Board.

In September 2008 we experienced the financial meltdown, so the RIOC Board was well aware of future financial risk, including the increased possibility that Southtown 7-9 would not be built, yet RIOC "bet the farm" with large expenses in the hopes of Southtown 7-9 being built. In December 2008, we had "elected" members on the RIOC Board, such as Jonathan Kalkin, who were in favor of such excess spending (Mr. Kalkin likes technology). The 2008 Tram upgrade could have spent only $15 million (from the State), but the RIOC Board chose the dual system at an extra cost of $10 million (from RIOC's lump sum payments).

Now let's roll forward to December 31, 2012 when Hudson-Related is supposed to have started building Southtown 7-9, or pay a $1.5 million de-designation fee. The contours of this negotiation are: the developers have RIOC over a barrel because RIOC will be desperate for money (without it RIOC goes bankrupt), RIOC is already in a cash poor situation (because of the extra $10 million spent on the Tram), which puts RIOC in the worst negotiating position -- much of this was understood in September 2008. The possible high-tech center at Goldwater won't significantly help RIOC (City-owned land), RIOC doesn't have $6-8 million in services to sell the universities, and the developers can wait on collaborating with Stanford/Cornell until after the de-designation deadline to maximize their negotiating position against RIOC.

So we keep getting these bad real estate deals where the developers/owners win and the Island loses. Oh there is another deal: Rivercross privatization deal for market rate conversion. The Wall Street Journal's article confirmed prior estimates: apartments would be sold at $500/sq-ft, with $150/sq-ft transfer fee back to the building, i.e., $350/sq-ft profit, which means about $200-400 million profit in the transaction. The RIOC Board determines the ground lease and determines what portion (zero to $350/sq-ft) of those sales come to RIOC, which 4 of 7 appointed directors come from Rivercross.

Former RIOC President Steve Shane has pointed out: those living in Mitchell-Lama buildings have already consumed their benefits via reduced rates, maintenance, ground leases, taxes, etc.. In other words, if you've had a $2000/month benefit for 35 years ($840,000), then you deserve very little of that $350/sq-ft profit and RIOC should have the rest. (Note: These are back of envelope numbers, not actual numbers.) Mr. Shane, while maintaining the State's concerns, got himself fired last year by this unbalanced board with a significant conflict of interest. In follow-up E-mails with RIOC Board Member Margie Smith, Matt Katz, Sherie Helstien, and other Maple Tree Group members just after the firing, Ms. Helstien says on June 30, 2010, "Perhaps I should forget about updating our signage for this coming Fall's plebiscite [election]? Shall we just call off any further voting?". Thus, discussion of cancelling the RIOC Board nominee elections was a result of (1) the Shane firing (now MTG has all their people on the board), (2) MTG legislation that would further restrict the Governor's involvement in RIOC (see full E-mails below).

This matters to all of us because we are all greatly affected by the Island's finances. The issues above are part of the subtext that drives these kinds of disagreements among residents on RIOC and in RIRA.
Click here for the emails referenced by Mr. Farance in next to last paragraph.

3 comments :

joe carbo said...

can you tell us how much money rioc got for eastwood coming out of mitchell lama

Trevre Andrews said...

Frank,

Thanks for your thoughtful explanation of the island finances.  This is the first I have heard of the 400 million in bonds.  Why is this not reported in the annual budget?  How does this affect property owners on the island?  

Frank Farance said...

First, let me explain the source of this information.  Over the past couple decades RIOC staff has, on occasion, made comments about the "bonds".  RIOC was created in 1984, but Roosevelt Island was created in the 1970s.  I've heard from RIOC staff and board members that: (1) bonds were issued in the 1970s to fund the development of Roosevelt Island, (2) when RIOC was created, they were responsible for paying back the monies not to bondholders but to Urban Development Corporation (UDC, now Empire State Development Corporation - ESDC), (3) RIOC would make these payments out of "profits".

As I understand the arrangement, UDC (now ESDC) would have been paying the bonds (I don't yet know which bonds and their status, still researching this), and RIOC would pay them back at some point in the future.  This might sound loosey-goosey, but they are both state agencies under the one executive (the Governor).  It is my understanding that ESDC has a willingness for some flexibility because these entities are involved in housing and community development with no guarantees of success.

Answer to Question #1: I believe the liability is not on RIOC's books because RIOC doesn't have the direct obligation to pay the bonds, only a fuzzy obligation ("best efforts" to repay UDC/ESDC, according to the 1984 law creating RIOC).  Likewise, the corresponding asset of Roosevelt Island isn't on RIOC's books either.  (I am trying to get more details from several sources.)

Answer to Question #2: There are no property owners on Roosevelt Island, only lease holders because the City owns the Island, the State has leased it from the City (through 2068), and all buildings and such sit on top of the State lease.

Answer to Question #3: As to why this is not reported in the annual budget, I don't yet know, but I'll try to find out.  It might be helpful for the annual budget to quote an except from the 1984 law and indicate how much and under what circumstances money would be transferred back to the State.  Considering that the State can simply take our money away to help with other State budget problems (as they have taken away assets from other public authorities), it might be helpful to state RIOC's intentions in advance of any argument over money.

As for the amount of $400 million, I've heard "hundreds of millions" from RIOC staff/board-members over the years.  I've tried to get a number: former RIOC VP Rosina Abramson - over $100 million, former Maple Tree Group Chair David Bauer - a quarter billion, RIOC CFO Steve Chironis - approximately $400 million.  I'm looking for a little more precision and I'll post it when I find it.