Taxpayers May Foot Bill for Penn Station Revitalization, Report Says

To restore the ailing Pennsylvania Station, both Gov. Kathy Hochul and her predecessor endorsed an extraordinary reimagining of Midtown Manhattan with 10 super-tall skyscrapers — among the largest real estate projects in American history.

The ambitious undertaking would be complex but necessary, they said, as the development of new towers would help pay for much-needed improvements at Penn Station, which was, before the pandemic, the busiest train station in the Western Hemisphere and, perhaps, the most universally disliked.

But just as New York State is set to approve the project as soon as next month, a new analysis by New York City’s Independent Budget Office has raised serious questions about the financial viability of the development, the state’s role in it and the possibility that taxpayers would have to foot the bill if the revenue its boosters are expecting fails to materialize.

Most strikingly, the report concludes, New York State has provided so few financial details about the 18.3-million-square foot project, that it is all but impossible to analyze the plan on the merits. The state’s cost projections have run the gamut from an original estimate of between $30 billion to $40 billion, to an estimate closer to $20 billion, now that the state is no longer bundling the Hudson Tunnel into the same project estimate, it said.

The reconstruction of Penn Station would be complete in 2032, before construction would start on half of the towers, largely consisting of office space, demand for which has declined markedly because of the pandemic-induced shift to working from home. The last building would be finished in 2044.

During that 12-year gap, the city agency said, revenue from the new buildings’ office leases, hotel rooms, retail and residences may not be enough to pay for the completed transit improvements, which would force taxpayers to cover the bill.

“Without this information, it doesn’t seem reasonable to actually be moving on to approving this program,” George Sweeting, the acting director of the Independent Budget Office, the nonpartisan agency that monitors the city budget, said in an interview.

A spokesman at the Empire State Development Corporation, the state agency leading the redevelopment, said that the project would not be brought to its board for approval until the financial questions have been resolved. Agency officials said that the city would be protected from financial risk because any shortfalls would be covered by the state.

“In addition to cooperating with the I.B.O. on its report, E.S.D. will continue to work with the community, the city, stakeholders and elected officials to ensure their priorities, including a fair financial structure, are in place prior to securing public approval,” the spokesman, Matthew Gorton, said.

“We will finally transform the area’s neglected business district, create much-needed affordable housing and social services, vastly enhance the commuter experience and provide a foundation for sustainable growth for the city and the broader region,” he added.

Despite the report’s findings, a spokesman for Mayor Eric Adams said that his administration was still committed to the state’s redevelopment plan.

“We are working constructively with our state partners to advance a project that transforms Penn Station and the surrounding area into the world-class transit hub New Yorkers deserve, in a fiscally responsible way,” the spokesman, Charles Lutvak, said.

The report amplifies many of the criticisms that were first raised by elected officials and community leaders when former Gov. Andrew M. Cuomo revealed the full scope of the project a year ago, just months before he resigned amid sexual-assault allegations.

It also echoes similar questions about the project’s finances posed by the New York City Planning Commission in a letter in January to Empire State Development.

“The project needs to be retired,” said Layla Law-Gisiko, a community board member in Midtown Manhattan who is running to represent the area in the State Assembly. “The rationale for this project to go forward is to generate the revenue. And this particular project is going to be costing money and not producing revenue.”

In many ways, the project mirrored Mr. Cuomo’s other efforts to put his imprint on the city, including the renovation of the Moynihan Train Hall across the street from Penn Station and his reconstruction of the city’s major airports in Queens.

In this case, the funds from the development would pay for cosmetic improvements at Penn Station, as well as a potential expansion of the station a block south of its current location. New tracks and platforms would add rail capacity along the economically vital corridor connecting commuters in New Jersey to jobs in New York, after a second tunnel is built under the Hudson River.

The state would wield its authority to overrule local zoning and planning laws so that developers could build bigger buildings at the site than otherwise allowed. When Ms. Hochul succeeded Mr. Cuomo, she continued the state’s support for the project while making modest changes to appease critics, such as expanding pedestrian pathways and slightly reducing the project’s proposed scale.

The report also highlights a key concern from critics: It would largely benefit a single company, Vornado Realty Trust, one of the city’s largest office developers. Vornado owns four sites in the development zone and part of a fifth, and its chief executive, Steven Roth, last year donated the maximum, $69,700, to Ms. Hochul’s campaign.

Mr. Roth, along with his family members, also gave Mr. Cuomo about $400,000 in campaign donations before he resigned. State officials and a Vornado spokesman have said the donations did not influence Vornado’s role in the venture. Mr. Roth has called the redevelopment of the Penn Station area Vornado’s “Promised Land.”

In an earnings call this week, Mr. Roth reiterated the company’s commitment to the state’s project. “Obviously, we support it,” he said.

A Vornado spokesman declined to comment on the record on the report.

Despite the state’s multiyear work on the project and its imminent approval, the Independent Budget Office found that the plan lacked a robust analysis of the numerous risks, including the consequences of the shift to remote work and whether the new Penn Station towers could negatively impact Hudson Yards, the enormous development on the far West Side of Manhattan. Hudson Yards opened in 2019 and has a similarly structured tax deal as the proposed Penn Station site.

“It’s a flashing yellow light that the Penn Station redevelopment plan at this stage has more questions than answers,” said Brad Hoylman, the State Senator whose district encompasses most of the proposed development. “There are significant risks that the state has not yet addressed.”

Officials have not reviewed whether a simple rezoning of the area to spur redevelopment could produce greater economic benefits and property-tax collections than the state’s project, the agency said. Yet, without the state’s proposal, the area is unlikely to entice developers, the agency said, noting the lack of construction in the Penn Station area. And while the mayor is pro-development, such a rezoning would be unlikely to proceed through the current City Council.

The state’s proposed financial scheme would suspend additional property taxes on the new towers but require Vornado and other developers to contribute an undetermined share of their revenues to pay down the construction costs at Penn Station.

But without financial specifics, the report said, it is not possible to determine whether the developers would pay less to the city and state in this deal than if the new buildings were subject to standard property taxes. And, while the state would still be collecting payments from developers, the city would lose out on extra property-tax revenue that it would have earned under a standard rezoning.

While the Penn Station area has not had seen large redevelopment in decades, Vornado executives have explored such projects in the area for years, which the city agency noted “may signal that little additional incentive is needed, if at all, for those sites.”

John Kaehny, the executive director of Reinvent Albany, a government watchdog group, said that the Independent Budget Office’s report makes clear that “the project does not stand up under scrutiny.”

“It’s an issue of putting a lot of taxpayers at risk for no reason other than helping Vornado,” Mr. Kaehny said. “It just doesn’t make sense from a public-financing and public-policy perspective.”