The Consultancy Scam
Hyperbole poisons everything in Washington. Phrases like “multi-trillion-dollar savings” and “billions in social returns” prevent anyone from soberly assessing the proposals that whiz around Capitol Hill and 1600 Pennsylvania Avenue. Yet such deluded thinking isn’t just confined to Washington. It’s also widespread outside of the nation’s capital.
In states and municipalities across the country, officials greenlight massive taxpayer-funded undertakings based on shoddy consultant reports that wouldn’t pass muster in an introductory economics course. Underlying these reckless projects are consultancies that are paid hundreds of thousands of taxpayer dollars to write reports that systematically overstate the benefits—and downplay the costs—of the proposals they are analyzing. These studies are analogous to the game show Jeopardy! where the host (city or municipality) already knows the answer it’s looking for and the contestants (consultants) are tasked with coming up with the correct question.
It’s time to say enough. State and local leaders need to critically examine these fluff reports and push for a full examination of the costs and benefits of each new project. Taxpayers deserve better than cavalier spending based on shady accounting.
Cities like building things. Projects like expansive new roads, sleek museums, prominent promenades, and, yes, streetcars, supposedly attract tourism and real estate revenues. Lofty rhetoric, though, can only take politicians so far in their push for new, shiny things funded on the taxpayer’s dime. They need concrete numbers to convince local spending boards and other lawmakers who might well be skeptical. Local governments therefore hire private consultants to make their proposals seem like a sure thing, even when success is far from assured.
When city officials sold the Hudson Yards redevelopment project in New York City based on bloated and unreliable financing figures, residents learned the hard way about the dark side of consultants. The premise of the project was simple enough. In the early 2000s, the Bloomberg administration came to the realization that the Big Apple simply did not have enough office space to cater to a growing economy. Midtown office rents were sky-high, and corporate professionals had few alternatives other than fleeing the city for cross-river municipalities such as Jersey City, Newark, and Hoboken.
Team Bloomberg decided to pitch the redevelopment of the underutilized Hudson Yards area, a part of the city that had not seen significant construction since the John D. Caemmerer West Side Storage Yard opened in 1986. The most compelling part of Mayor Bloomberg’s pitch, though, was not about the “best possible use of land” or how commercial use was a better idea than building a stadium in Hudson Yards. It was that the project would basically pay for itself. As economic researchers Bridget Fisher and Flávia Leite note, “The development of a commercial office district on the city’s Far West Side, Hudson Yards, was sold to city residents as a ‘self-financed’ TIF-type project… However, by definition, Hudson Yards is not ‘self-financing.’” Taxpayer dollars were being used to foot the bill for cost overruns and narrowly targeted tax breaks once promised revenue failed to materialize. In all, expenses “totaled $2.2 billion in taxpayer support for Hudson Yards.”
But the public were led to believe otherwise thanks to a rosy report (funded by taxpayers) produced by consultancy and commercial real estate firm Cushman and Wakefield (C&W). The report showed that any costs borne by the city could be recouped by the revenue that would flow into city coffers due to the influx of business activity at Hudson Yards. The Bloomberg administration took Cushman’s financial projections and ran with them, even though the actual figures differed significantly from bloated projections. Estimates wildly missed the mark, and actual revenues were orders of magnitude lower than projections. According to Fisher and Leite, “In 2006, C&W projected HYIC [Hudson Yards Infrastructure Corporation] revenues would be $1.9 billion by FY 2018…but actual revenues came in at $1.3 million. This left HYIC $556 million short, or 30 percent less than projected.”
These numbers missed the mark largely due to the Great Recession in 2008, which left a large revenue hole for city and state governments nationwide and stunted real estate development. Cushman and Wakefield failed to consider worst-case scenarios in a market that inevitably experiences booms and busts. According to the most pessimistic course of events charted by C&W, city taxpayers would need to shell out around $200 million in interest payments for the bonds taken out for the Hudson Yards boondoggle. In real life, the bill turned out to be $300 million and counting.
And then, of course, there’s the more than $2 billion in principal to be paid by a city that is already facing a $5 billion deficit by 2023. It’s hard to know how Hudson Yards will pan out as a new neighborhood once development is completed in the next six years or so. In the worst case, the pandemic permanently reduces the appetite for this sort of commercial development. Under a brighter scenario, Hudson Yards sheds its former blighted image and becomes a vibrant part of New York City. But one thing is for sure: New York City taxpayers didn’t get the full picture of costs and continuum of risks.
City residents might rightly wonder what went wrong as they dole out thousands of dollars to pay their tax bills. The truth is, there’s probably no “smoking gun” of a consultancy like Cushman and Wakefield getting paid to produce rosy projections in their report to the city. While even the amount of money that Hudson Yards Infrastructure Corporation paid to Cushman remains a mystery, similar sorts of commissions to produce reports range in the hundreds of thousands of dollars. The firms hired to author these cost-benefit analyses are well-aware of who their customers are, and they seem to realize that writing favorable reports on projects are likely to earn them repeated business. That strategy certainly seems to have paid off for C&W; the company has produced multiple taxpayer-funded follow-up reports on the Hudson Yards projects in the years since their 2006 study.
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Unfortunately, these troubling partnerships between consultancies and state and local governments are a dime a dozen. Streetcar systems, for example, have been repeatedly panned by transportation experts as being prohibitively expensive while serving little practical benefit. It’s hard to justify a $25 million-per-mile streetcar that will serve the same purpose as a $500,000 city bus. But that hasn’t stopped local leaders from trying to make the numbers work any way that they can.
In the first decade of the 2000s, Cincinnati city leadership was pushing hard for the creation of a streetcar. Mayor Mark Mallory and city manager Milton Dohoney excitedly played up the idea, claiming that a streetcar could turbocharge development particularly in Downtown and the Over-the-Rhine neighborhood of Cincinnati. By the end of 2006, city leaders greenlit a feasibility study for the proposal and paid Omaha-based engineering firm HDR to take the lead.
HDR predictably produced a report that touted the myriad benefits of a city streetcar and concluded that a 3.9-mile system would lead to $1.4 billion in long-term investments and benefits such as jobs and housing. While the numbers gave city officials concrete benefits to tout in meetings and speeches, the foundation for the figures was flimsy. Similar to other streetcar feasibility studies, HDR incorporated the value of vacant and underutilized space in their estimate of streetcar benefits. The basic theory is that, if a streetcar succeeds in bringing more people into certain neighborhoods, the real estate value in those neighborhoods will climb and spur developers to make more efficient use of the land.
The report’s authors let this vague possibility do a lot of heavy lifting, assuming that parking lots would be converted to higher-valued uses once the streetcar came to town. This was a strange assumption, given that parking lots and garages are quite valuable and are present along corridors in other cities (e.g., H Street in Washington, D.C.) where there are streetcar lines. There are also parking mandates imposed by virtually all cities, including Cincinnati, although the Ohio city has been moving in the right direction by rolling those back. HDR also talks about the possible role of the streetcar in redeveloping vacant and underutilized buildings, even though other factors such as bond debt, unpaid taxes, and historic preservation tax credits are far more important factors in redevelopment.
But HDR failed to adequately account for these considerations and instead trudged forward with estimated bloated benefits. One review of the study done by the University of Cincinnati warned, “Not all the assumptions associated with the benefits are…clearly explained.” Even worse, “the HDR study does not discuss other investment alternatives that might be considered by the City” and hardly even mentions buses as a lower-cost alternative. But those minor details hardly mattered to city leadership. They got exactly what they wanted: a narrowly tailored study that would allow them to spin a boondoggle into a reasonable-sounding project.
Disappointment struck as the project inched closer to completion. Disputes with utility companies, soaring project costs, and constant bickering at City Hall delayed the streetcar project and made even steadfast supporters think twice about the plan. When service finally started in 2016—nearly 10 years after the feasibility study—it quickly became apparent that ridership would not pan out. Average daily (pre-pandemic) totals hovered between 1,500 and 2,000 rides, a far cry from the 5,000-to-8,000 range predicted by HDR. And while the streetcar did charge modest prices at first, it looks like there will be no fare going forward. The project is in a state of perpetual deficit, and the red ink will only surge as ticket revenue plunges to zero. And while Cincinnati did see a reduction in vacancies over the past 10 years, it’s highly unlikely that the streetcar made a dent given lackluster ridership. It turns out that neighborhood redevelopment initiatives are far more important than an underutilized, costly streetcar.
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Hindsight is 20/20, and municipalities are routinely left with bank-breaking boondoggles after paying private consultancies top dollar to justify far-fetched taxpayer funded projects. The practice is also commonplace in the world of municipal broadband, where cities are desperate to justify building their own internet networks instead of lowering barriers to private deployment.
According to a 2020 municipal broadband report by the Taxpayers Protection Alliance (TPA), “Reminiscent of the Broadway hit The Music Man, telecom consultants ride into town and promise inexpensive networks that will attract thousands of customers. Some consultants even promise high take rates (percentage of subscribers to the service).” Yet TPA concludes that there’s routinely a large gap between private consultant projections and completed project results, with the difference being borne by local taxpayers.
What can be done to prevent this scenario? Local governments need better systems for ensuring that they go into projects with their eyes wide open. This doesn’t mean that consultancies should never produce feasibility reports, but there should be far more transparency and independent auditing when they do so.
For starters, taxpayers should always be able to easily look up how much cities and states are paying for these privately produced studies. Bloated commissions could be a sign of trouble and perverse incentives. Additionally, independent auditors should be given a broad mandate to analyze consultant projections versus reality and recommend severing ties with consultants that widely miss the mark. These companies are performing a valuable service for taxpayers and should be penalized for predictions totally divorced from reality.
States and localities should also make sure that the consultancies commissioned to perform these analyses don’t have any sort of hidden stake in the projects they are studying. Conflicts of interest can become particularly costly when millions of taxpayer dollars are on the line. None of these reforms alone will be a panacea for fixing this deluge of consultant yes-work, but they can go a long way toward fixing a deeply broken system.
Ross Marchand is a senior fellow at the Taxpayers Protection Alliance.