On March 6, 2015, the Wichita Pachyderm Club hosted the first forum for mayoral candidates after the primary election. Jeff Longwell and Sam Williams are the candidates for the April 7, 2015 general election.
Based on events in Wichita, the Wall Street Journal wrote “What Americans seem to want most from government these days is equal treatment. They increasingly realize that powerful government nearly always helps the powerful …” But Wichita’s elites don’t seem to understand this.
Three years ago from today the Wall Street Journal noted something it thought remarkable: a “voter revolt” in Wichita. Citizens overturned a decision by the Wichita City Council regarding an economic development incentive awarded to a downtown hotel. It was the ninth layer of subsidy for the hotel, and because of our laws, it was the only subsidy that citizens could contest through a referendum process.
In its op-ed, the Journal wrote:
The elites are stunned, but they shouldn’t be. The core issue is fairness — and not of the soak-the-rich kind that President Obama practices. One of the leaders of the opposition, Derrick Sontag, director of Americans for Prosperity in Kansas, says that what infuriated voters was the veneer of “political cronyism.”
What Americans seem to want most from government these days is equal treatment. They increasingly realize that powerful government nearly always helps the powerful, whether the beneficiaries are a union that can carve a sweet deal as part of an auto bailout or corporations that can hire lobbyists to write a tax loophole.
The “elites” referred to include the Wichita Metro Chamber of Commerce, the political class, and the city newspaper. Since then, the influence of these elites has declined. Last year all three campaigned for a sales tax increase in Wichita, but voters rejected it by a large margin. It seems that voters are increasingly aware of the cronyism of the elites and the harm it causes the Wichita-area economy.
Last year as part of the campaign for the higher sales tax the Wichita Chamber admitted that Wichita lags in job creation. The other elites agreed. But none took responsibility for having managed the Wichita economy into the dumpster. Even today the local economic development agency — which is a subsidiary of the Wichita Chamber — seeks to shift blame instead of realizing the need for reform. The city council still layers on the levels of subsidy for its cronies.
Following, from March 2012:
A Wichita shocker
“Local politicians like to get in bed with local business, and taxpayers are usually the losers. So three cheers for a voter revolt in Wichita, Kansas last week that shows such sweetheart deals can be defeated.” So starts today’s Wall Street Journal Review & Outlook editorial (subscription required), taking notice of the special election last week in Wichita.
The editorial page of the Wall Street Journal is one of the most prominent voices for free markets and limited government in America. Over and over Journal editors expose crony capitalism and corporate welfare schemes, and they waste few words in condemning these harmful practices.
The three Republican members of the Wichita City Council who consider themselves fiscal conservatives but nonetheless voted for the corporate welfare that voters rejected — Pete Meitzner (district 2, east Wichita), James Clendenin (district 3, southeast and south Wichita), and Jeff Longwell (district 5, west and northwest Wichita) — need to consider this a wake up call. These members, it should be noted, routinely vote in concert with the Democrats and liberals on the council.
The Wichita business community, headed by the Wichita Metro Chamber of Commerce endorsed this measure, too.
Hopefully this election will convince Wichita’s political and bureaucratic leaders that our economic development policies are not working. Combined with the startling findings by a Tax Foundation and KMPG study that finds Kansas lags near the bottom of the states in tax costs to business, the need for reform of our spending and taxing practices couldn’t be more evident. It is now up to our leaders to find within themselves the capability to change — or we all shall suffer.
A downtown Wichita project receives free sales taxes and a bypass of Wichita’s code of conduct for city council members. Remarks to the Wichita City Council, March 3, 2015.
Regarding the Exchange Place project in downtown Wichita, I’d like to remind the council of the entire subsidy package offered to the project.
There are historic preservation tax credits, which may amount to 25 percent of the project cost. These credits have the same economic impact as a cash payment, and their cost must be born by taxpayers.
There is $12.5 million in tax increment financing, which re-routes future property tax revenues back to the project for the benefit of its owners. Most everyone else pays property taxes in order to pay for government, not for things that benefit themselves exclusively, or nearly so.
There is a federal loan guarantee, which places the federal taxpayer on the hook if this project isn’t successful.
The owner of this project also seeks to avoid paying sales taxes on the purchase of materials. City documents don’t say how much this sales tax forgiveness might be worth, but it easily could be several million dollars.
Mayor and council, if it in fact is truly necessary to layer on these incentives in order to do a project in downtown Wichita, I think we need to ask: Why? Why is it so difficult to do a project in downtown Wichita?
Other speakers will probably tell you that rehabilitating historic buildings is expensive. If so, working on historic buildings is a choice they make. They, and their tenants, ought to pay the cost. It’s a lifestyle choice, and nothing more than that.
But I’m really troubled about the sales tax exemption. Just a few months ago our civic leaders, including this council, recommended that Wichitans add more to our sales tax burden in order to pay for a variety of things.
Only 14 states apply sales tax to food purchased at grocery stores for home consumption, and Kansas has the second-highest statewide rate. So we in Kansas, and Wichita by extension, require low-income families to pay sales tax on their groceries. But today this council is considering granting an exemption from paying these taxes that nearly everyone else has to pay.
These tax subsidies are not popular with voters. Last year when Kansas Policy Institute surveyed Wichita voters, it found that only 34 percent agreed with the idea of local governments using taxpayer money to provide subsidies to certain businesses for economic development. Then, of course, there is the result of the November sales tax election.
Might I also remind the people of Wichita that some of their taxpayer-funded subsidies are earmarked to fund a bailout for a politically-connected construction company for work done on a different project, one not related to Exchange Place except through having common ownership in the past? I don’t think it is good public policy for this city to act as collection agent for a private debt that has been difficult to collect.
This project is slated to receive many million in taxpayer-funded subsidy. Now this council proposes to wave a magic wand and eliminate the cost of sales tax for its owners. People notice this arbitrary application of the burden of taxation. They see certain people treated differently under the law, rather than all being treated equally under the law. People don’t like this. It breeds distrust in government. This council can help restore some of this trust by not issuing the Industrial Revenue Bonds and the accompanying sales tax exemption.
The ethics problem for the city
Although I did not mention this to the council, Mayor Carl Brewer should not have voted on this matter. The politically-connected construction company that benefits from this deal through a taxpayer-funded bailout Key Construction. Its president, Dave Wells, is a friend of the mayor, as well as frequent and heavy campaign financier for the mayor and other council members.
This is a problem, as there is a law in Wichita. Here’s an excerpt from Section 2.04.050 Code of ethics for council members from the Wichita city code as passed in 2008:
“[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.”
Dave Wells and Carl Brewer are friends. The mayor has said so. But the City of Wichita’s official position is that Section 2.04.050 does not need to be followed. Even children can see that elected officials should not vote economic benefits for their friends — but not the City of Wichita.
From January 2012, how tax increment financing routes benefits to politically-connected firms.
The latest evidence we have is the construction of a downtown parking garage that benefits Douglas Place, especially the Ambassador Hotel, a renovation of a historic building now underway.
The flow of tax dollars Wichita city leaders had planned for Douglas Place called for taxpayer funds to be routed to a politically-connected construction firm. And unlike the real world, where developers have an incentive to build economically, the city created incentives for Douglas Place developers to spend lavishly in a parking garage, at no cost to themselves. In fact, the wasteful spending would result in profit for them.
The original plan for Douglas Place as specified in a letter of intent that the city council voted to support, called for a parking garage and urban park to cost $6,800,000. Details provided at the August 9th meeting of the Wichita City Council gave the cost for the garage alone as $6,000,000. The garage would be paid for by capital improvement program (CIP) funds and tax increment financing (TIF). The CIP is Wichita’s long-term plan for building public infrastructure. TIF is different, as we’ll see in a moment.
At the August 9th meeting it was also revealed that Key Construction of Wichita would be the contractor for the garage. The city’s plan was that Key Construction would not have to bid for the contract, even though the garage is being paid for with taxpayer funds. Council Member Michael O’Donnell (district 4, south and southwest Wichita) expressed concern about the no-bid contract. As a result, the contract was put out for competitive bid.
Now a winning bid has been determined, according to sources in city hall, and the amount is nearly $1.3 million less than the council was willing to spend on the garage. This is money that otherwise would have gone into the pockets of Key Construction. Because of the way the garage is being paid for, that money would not have been a cost to Douglas Place’s developers. Instead, it would have been a giant ripoff of Wichita taxpayers. This scheme was approved by Mayor Carl Brewer and all city council members except O’Donnell.
Even worse, the Douglas Place developers have no incentive to economize on the cost of the garage. In fact, they have incentives to make it cost even more.
Two paths for developer taxes
Recall that the garage is being paid for through two means. One is CIP, which is a cost to Wichita taxpayers. It doesn’t cost the Douglas Place developers anything except for their small quotal share of Wichita’s overall tax burden. In exchange for that, they get part of a parking garage paid for.
But the tax increment financing, or TIF, is different. Under TIF, the increased property taxes that Douglas Place will pay as the project is completed won’t go to fund the general operations of government. Instead, these taxes will go to pay back bonds that the city will issue to pay for part of the garage — a garage that benefits Douglas Place, and one that would not be built but for the Douglas Place plans.
Under TIF, the more the parking garage costs, the more Douglas Place property taxes are funneled back to it — taxes, remember, it has to pay anyway. (Since Douglas Place won’t own the garage, it doesn’t have to pay taxes on the value of the garage, so it’s not concerned about the taxable value of the garage increasing its tax bill.)
Most people and businesses have their property taxes go towards paying for public services like police protection, firemen, and schools. But TIF allows these property taxes to be used for a developer’s exclusive benefit. That leads to distortions.
Why would Douglas Place be interested in an expensive parking garage? Here are two reasons:
First, the more the garage costs, the more the hotel benefits from a fancier and nicer garage for its guests to park in. Remember, since the garage is paid for by property taxes on the hotel — taxes Douglas Place must pay in any case — there’s an incentive for the hotel to see these taxes used for its own benefit rather than used to pay for firemen, police officers, and schools.
Second, consider Key Construction, the planned builder of the garage under a no-bid contract. The more expensive the garage, the higher the profit for Key.
Now add in the fact that one of the partners in the Douglas Place project is a business entity known as Summit Holdings LLC, which is composed of David Wells, Kenneth Wells, Richard McCafferty, John Walker Jr., and Larry Gourley. All of these people are either owners of Key Construction or its executives. The more the garage costs, the higher the profit for these people. Remember, they’re not paying for the garage. City taxpayers are.
The sum of all this is a mechanism to funnel taxpayer funds, via tax increment financing, to Key Construction. The more the garage costs, the better for Douglas Place and Key Construction — and the worse for Wichita taxpayers.
Fueled by campaign contributions?
It’s no wonder Key Construction principals contributed $16,500 to Wichita Mayor Carl Brewer and five city council members during their most recent campaigns. Council Member Jeff Longwell (district 5, west and northwest Wichita) alone received $4,000 of that sum, and he also accepted another $2,000 from managing member David Burk and his wife.
This scheme — of which few people must be aware as it has not been reported anywhere but here — is a reason why Wichita and Kansas need pay-to-play laws. These laws impose restrictions on the activities of elected officials and the awarding of contracts.
An example is a charter provision of the city of Santa Ana, in Orange County, California, which states: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”
This project also shows why complicated financing schemes like tax increment financing need to be eliminated. Government intervention schemes like this turn the usual economic incentives upside down, and at taxpayer expense.
Sam Williams, a candidate for Wichita mayor, is not entitled to use the title “CPA,” according to Kansas law.
“I am a Certified Public Accountant.”
“– Sam Williams, CPA”
“CPA Sam Williams”
“Being a CPA, Sam Williams …”
“Bert Denny, CPA — Treasurer”
These are some of the statements you’ll find on campaign and biographical material for Wichita mayoral candidate Sam Williams. But he isn’t licensed as a CPA, and Kansas law is clear on who can use the title “CPA.”
Kansas law states: “It is unlawful for any person, except the holder of a valid certificate or practice privilege pursuant to K.S.A. 1-322, and amendments thereto, to use or assume the title ‘certified public accountant’ or to use the abbreviation CPA …”
When asked if he was a licensed CPA in Kansas, Williams said that he was certified, but doesn’t have a license to practice. Asked about the statute that regulates unlawful use of the title “CPA,” Williams said “I never heard that before.”
It’s understandable that Williams does not have a CPA license in Kansas. He had such a license in Utah, expiring in 1990. In Wichita he worked as an executive in the advertising industry. He was not offering accounting services to the public.
As candidate for mayor of Wichita, the title “CPA” is front and center in Williams’ campaign. Advertising pieces make frequent use of the title, promoting business-related qualifications like knowing how to balance a budget and minimizing taxes.
We might dismiss this use of the CPA title as the type of resume-burnishing that is routine for candidates, and perhaps for anyone looking for a job. But Kansas has a law.
It’s not an obscure law, as this issue has been in the news. Last year United States Representative Lynn Jenkins of Topeka was granted special treatment by the Kansas Board of Accountancy, allowing her to continue to use the title “CPA” even though her license had expired. This was widely reported, and the Wichita Eagle editorialized on this issue, quoting a Nebraska accounting board official as saying “She’s misleading the public.”
Sam Williams knew of the Jenkins case. He mentioned her by name when asked about using the “CPA” title. He knew of the controversy.
Of note, Williams’ treasurer is a CPA.
The Kansas statute
A Kansas law, K.S.A. 1-316 (c), states “It is unlawful for any person, except the holder of a valid certificate or practice privilege pursuant to K.S.A. 1-322, and amendments thereto, to use or assume the title ‘certified public accountant’ or to use the abbreviation CPA or any other title, designation, words, letters, abbreviation, sign, card or device likely to be confused with ‘certified public accountant.'”
A violation of this law is a misdemeanor, carrying a fine of up to $5,000 and up to one year imprisonment, or both.
Inquiry to the Kansas Board of Accountancy finds that Sam Williams has never had a CPA certificate in Kansas. His certificate from Utah expired in 1990, about the time Williams moved from Utah to Kansas.
While the statue seems clear, additional information from the Kansas Board of Accountancy is less than clear. In a document titled Who may use the CPA title in Kansas?, holds this advice; “For instance — if the CPA is a controller, CFO or an employee of a company that is not a CPA firm, whose responsibilities are to his/her employer only, then the use of CPA is allowable if used with the person’s name, the name of the company, and the person’s position with the company.”
This seems to allow someone like Williams — who was an executive with an advertising agency until retiring last year — some latitude in the use of the CPA title.
But the same document holds this: “What is also not allowed without a valid permit to practice, is advertising, phone book listing, letterhead, signature as a CPA on documents provided to the public (this includes friends and family), or third parties relying on the information provided.”
Wichita has stepped up with cash for incentives when needed, contrary to complaints of economic development officials.
But recent history shows that when cash is needed, local governments have responded positively.
When Hawker Beechcraft threatened to leave Wichita for Baton Rouge, Wichita and Sedgwick County contributed $2.5 million each for an incentive. (Never mind that the threat to move was not real.)
Not long after that, the city and county contributed $1 million each for an incentive for Bombardier Learjet.
So there is recent history that shows when officials feel that spending on cash incentives is necessary, the city and county find the money. It’s difficult to imagine that if GWEDC officials had come to the city or county with a need for cash — especially if a deal was truly hinging on a cash contribution — that the council and commission would not find the money somewhere.
Job creation in context
For 2014, GWEDC claims credit for creating or retaining 424 jobs.
The Bureau of Labor Statistics tells us that for 2014, the labor force for local geographies was:
Sedgwick County: 242,460
Metro Wichita: 300,911
For each area, 424 jobs amounts to this percent of the labor force:
Wichita: 0.23 percent
Sedgwick County: 0.17 percent
Metro Wichita: 0.14 percent
Sales tax not about cash, they said
While economic development officials complain of lacking a deal closing fund, during last year’s sales tax campaign we were told that Wichita would not be competing by giving out cash. Material on the “Yes Wichita” campaign website, under the heading “Why is this plan different?” reads “It’s not about cash for jobs — it’s about investing in ourselves.”
Later on the same page: “We’ll let other cities compete with cash and instead we’ll invest in our people and infrastructure.”
A problem with wasteful spending in downtown Wichita is gradually curing itself, creating another problem in its place.
So wasteful spending on street lights during the day is being replaced by unlit streets at night.
What message does wasteful spending on street lights during the day send?
Perhaps more importantly, what impression does nonfunctioning lights at night create — three of four at this bench? And at one of our major downtown intersections? Across the street from our nice boutique hotel?
Is this the “walkable” downtown we’re trying to create?
I suppose that Wichita city leaders want to be seen taking care of our larger problems, and of those, we have a few. But this long-running problem with lights at this downtown street side bench needs to be taken care of soon. Visitors to our town may not be aware of the lofty and sweeping rhetoric of our mayor, bureaucrats, and civic leaders.
But they do notice the downtown street lights.
On February 19, 2015 the Sedgwick County Republican Party held a forum for Republican candidates for Wichita mayor. Attending, in the order of their appearance, were Sean Hatfield, Dan Heflin, Jeff Longwell, Sam Williams, and Jennifer Winn. Todd Johnson moderated. Jennifer Baysinger compiled questions from the audience and asked them of candidates. Sue Colaluca was the timing judge.
On February 17, 2015 Coalition for a Better Wichita sponsored a forum for the ten candidates running for Wichita mayor. Jennifer Baysinger is the moderator.
In this excerpt from WichitaLiberty.TV: Wichita’s legislative agenda concerning transportation issues is unsound. For airfares, it relies on a questionable presentation, and for passenger rail, it advocates for a system that is costly for taxpayers. View below, or click here to view at YouTube. Originally broadcast December 7, 2014.
For more on this issue, see: City of Wichita State Legislative Agenda: Airfares and City of Wichita State Legislative Agenda: Passenger rail
Here’s a timeline of events from the tenure of Lavonta Williams on the Wichita City Council. These are events related to cronyism and disrepect for the people of Wichita — except for her campaign contributors. For them, she voted for no-bid contracts and other taxpayer-funded largess. The behavior of Williams is one of the reasons that Wichita needs pay-to-play laws that prevent council members from voting to enrich their significant campaign contributors.
Here’s a timeline of events from the tenure of Jeff Longwell on the Wichita City Council. These are events related to cronyism and disrepect for the people of Wichita — except for his campaign contributors. For them, he voted for no-bid contracts and other taxpayer-funded largess. The behavior of Longwell is one of the reasons that Wichita needs pay-to-play laws that prevent council members from voting to enrich their significant campaign contributors.
There are things both easy and difficult Wichita could do to make the city inclusive and welcoming of all, especially the young and diverse.
In its questionnaire for candidates for Wichita mayor and city council, the Wichita Metro Chamber of Commerce asked this: “How will you work to make Wichita an inclusive community where all will feel welcome, particularly the young and diverse talent we need to help attract more young and diverse talent?”
There are a few very easy things Wichita could do to appeal to millennials — I think that is one of the groups the Chamber addresses in its questions — and diverse people.
Support the decriminalization of marijuana. The city council reacted to a recent petition to reduce the penalty for carrying small amounts of marijuana by placing the measure on the April general election ballot. Another option the city had was to adopt the ordinance as submitted. That would have sent a positive message to millennials, but the council did not do that.
Ask the state to positively end marriage discrimination. The city has a legislative agenda it prepares for state legislators each year, but this matter was not mentioned.
Wichita should reform its taxicab regulations so that ride-sharing businesses like Uber are operating fully within the law, instead of outside the law as Uber is currently operating. Uber is an example of the type of innovation that city officials and civic leaders say we need, and millennials love Uber. But: Uber has been operating in Wichita since August. Uber has model legislation that could be adopted quickly. Yet, six months later the city has not acted. This delay does not send a message that Wichita welcomes innovation. Instead, it sends a message that the regulatory regime in Wichita is not able to adapt to change.
Pledge to resist the growth of the surveillance state. No street surveillance cameras in Wichita. No mass license plate scanning by police.
To the extent there are problems with the Wichita Police Department, resolve them so that citizens feel safe and minorities feel welcome and not threatened. A citizen oversight panel that has real authority would be a good step. Proceed quickly with implementation of police body cameras. End the special entertainment districts, which many feel are targeted at minority populations.
Here’s a bad idea, but an indication what passes for innovation at the Wichita Chamber: Pay down the student loan debt of young people. This is a bad idea on several levels. First, it rewards those who borrowed to pay for college. Those who saved, worked, or went to inexpensive colleges are not eligible this benefit. Further, if we award this incentive, those who receive it might wonder if that someday they will be taxed to provide this benefit to younger people. After all, the corollary of “Come to Wichita and we’ll pay down your student loan” is “Stay in Wichita, and you’re going to be paying down someone else’s student loan.” If the Chamber wished to raise funds voluntarily to provide such a program, that would be fine. But no tax funds should be used for anything like this.
What Wichita really needs to do
Most of the above are relatively easy to accomplish. Here’s something that is very important, something that should be easy to do, but goes against the grain of elected officials, bureaucrats, and civic leaders like those who run the Wichita Metro Chamber of Commerce. That is: Promote free markets instead of government management of the economy.
A Reason-Rupe survey of 2,000 Americans between the ages of 18 and 29 found that millennials strongly prefer free markets over a government-managed economy. When asked to choose the better system, 64 percent of millennials choose the free market over an economy managed by the government (32 percent).
Also, the survey found that millennials are distrustful, believing that government acts in favor of special interest groups and that government abuses its powers: “A Reason-Rupe survey of 2,000 Americans between the ages of 18 and 29 finds 66 percent of millennials believe government is inefficient and wasteful — a substantial increase since 2009, when just 42 percent of millennials said government was inefficient and wasteful. Nearly two-thirds of millennials, 63 percent, think government regulators favor special interests, whereas just 18 percent feel regulators act in the public’s interest. Similarly, 58 percent of 18-to-29 year-olds are convinced government agencies abuse their powers, while merely 25 percent trust government agencies to do the right thing.”
What could Wichita do, in light of these findings? One thing is to stop its heavy-handed regulation of development, particularly the massive subsidies directed to downtown Wichita.
We should take steps to make sure that everyone is treated equally. Passing “pay-to-play” ordinances — where city council members or county commissioners are prohibited from voting on matters that would enrich their campaign contributors — would be a first step in regaining the trust of citizens.
We also need to reform our economic development practice to favor entrepreneurship. Millennials like to start businesses, the survey tells us: “55 percent of millennials say they’d like to start their own business one day and that hard work is the key to success (61 percent). Millennials also have a positive view of the profit motive (64 percent) and competition (70 percent).” Much of our economic development practice consists of directing subsides to our existing large firms or large firms we hope to lure here. But young and small firms — entrepreneurial firms, in other words — can’t qualify for most of our incentive programs. For example. the programs that offer property tax abatements have lengthy application forms and other obstacles to overcome, plus annual fees. Sometimes there are minimum size requirements. Young firms can’t suffer through this red tape and the accompanying bureaucratic schedules.
In this excerpt from Wichitaliberty.TV: Readers of the Wichita Eagle might be excused for not understanding the economic realities of a proposed tax giveaway to a local development. View below, or click here to view at YouTube. Originally broadcast September 14, 2014.
For more on this issue, see: Wichita economic development, one more untold story.
Which buildings in Wichita have historic value can change at the whim of the council.
The Wichita City Council has decided that three historic buildings in Wichita are no longer worthy of preservation. Today the council reversed a decision by the Historic Preservation Board and will allow the property owner to proceed with the demolition of three formerly historic buildings in southern downtown Wichita.
The impetus for the demolition is a request by the new property owners, who also own the nearby WaterWalk development.
For those who believe in property rights, if the owner of a building wants to tear it down, that is their right. The owners should not have to ask anyone’s permission. The owners should not have to overcome regulations created by busybodies who claim rights to property based on their assertion that they know what is the best use of others’ property.
So it is strange to see the council consent to the request of these developers. The WaterWalk development has received many millions of taxpayer subsidy and has produced very little benefit so far. Even the editorial board of the Wichita Eagle can see that. I’m almost surprised that the council was not skeptical of the judgment of the property owners.
At a meeting of the Sedgwick County Republican Party, Republican candidates for Wichita city council districts 4 and 5 spoke. January 22, 2015. For district 4 the candidates are Jeff Blubaugh and Josh Shorter. For district 5, Gary Bond and Bryan Frye. Video courtesy Mike Shatz of Kansas Exposed. View below, or click here to view in high definition at YouTube.
The Wichita city council voted to recommend that the Kansas Legislature create drivers permits for undocumented workers so they could drive to their jobs.
In December the Wichita City Council voted to include drivers permits for undocumented workers in its legislative agenda. The item as presented to council members read: “RECOMMEND: The Wichita City Council supports legislation that provides a driver’s permit to undocumented workers for the sole purpose of obtaining vehicle insurance for work-related transportation.”
In his remarks, as presented in the meeting minutes, Wichita Mayor Carl Brewer stated “he has given this a lot of thought and he is the one who has asked for it because he believes it is the right thing to do.”
The measure passed four to three, with Council Member Jeff Blubaugh (district 4, south and southwest Wichita) voting along with the council’s progressive members.
No matter what one believes about our immigration laws, it is illegal for undocumented workers to hold their jobs. Yet, the city wants to make it legal for them to drive to their illegal jobs.
This also illustrates the problem with resolving our nation’s issues with immigration. We’ve shown that we’re not willing to enforce the laws we have. Here, the Wichita City Council takes steps to help illegal immigrants break our laws. Why do we expect people to respect and obey them?
An incentives agreement the Wichita city council passed on first reading is missing several items that city policy requires. How the council and city staff handle the second reading of this ordinance will let us know for whose interests city hall works: citizens, or cronies.
My presentation centered on the lack of an agreement by the developer to forgo appeals of the tax valuation of the property. The applicant had done this in the past, and it caused a shortfall of TIF revenue that the city had to makeup. The city manager had said that taxpayers would be protected in future deals, but the city did not include this protection in the Mosely agreement.
The omission of this taxpayer protection was not all that was missing. The Downtown Development Incentives Policy, revised by the council on June 10, 2014, calls for several items to be supplied when seeking incentives, including tax increment financing, which was the incentive requested for the Mosely project. As I show below, many significant items related to taxpayer protection were missing.
The council approved the project on first reading, noting that the development agreement would be finalized in time for second reading.
This is insufficient. The second reading of an ordinance is usually handled as part of the consent agenda. This is a grouping of items that are voted on as a group, in bulk. There is no discussion unless a council member specifically requests. The practice of the city is that the text of the ordinances on second reading is not made available in the agenda packet, even though changes may have been made between first reading and second reading. That will certainly be the case with this ordinance, as many things are missing from the development agreement.
It’s not clear why there is a first reading and a second reading of an ordinance. It may be so that details may be corrected. Or, perhaps council members would like to have a chance to reconsider their first vote. City code seems to give no guidance as to how much change to an ordinance is allowable between first and second reading.
The problem we face in Wichita is that the approval of a development plan in a TIF district has a mandated public hearing. It is not optional. But the motion passed by the council this week closed the public hearing. Yet, the city will need to make substantial changes to the ordinance and development agreement if it intends to follow the downtown incentives policy that it created. But the public will have no chance to comment on the new material. If past city practice is followed, the new material will not be made available to the public, and perhaps not to council members.
This is a conflict that I do not believe can be resolved unless the city reopens the public hearing for consideration of the revised ordinance and developer agreement on first reading. Anything else disrespects procedures that are designed to benefit and protect the public.
Except. As with many city council policies, there are loopholes. As outlined below, the council can simply vote to waive the requirements of the downtown incentives policy. That gives the council an easy out. But that makes another mockery of the city’s policies, if the council waives them whenever they are inconvenient.
When I presented the defect in the development agreement to the council I asked: Is this lack of taxpayer protection an oversight, or is it by design? There was no answer.
I did not ask this question, but didn’t any city council member notice the omission of significant items needed to comply with its own policies? What about the city manager? Economic development director? City attorney?
More importantly, who in city hall looking out for the interests of taxpayers? Could the generous campaign contributions of Burk and his wife be a factor in this missing taxpayer protection? Or the generous contributions of Key Construction and its executives? (Key Construction is frequently used by Burk.) This is one more incident illustrating the need for campaign finance reform in Wichita.
Section D of the incentives policy states “parties requesting Downtown Development Incentives must submit the information listed below.” Significant missing items included the following:
CEDBR Fiscal Impact Model
The idea behind the city’s use of economic development incentives is that the city receives more than it spends or forgoes in future tax revenue. An analysis performed by the Center for Economic Development and Business Research (CEDBR) at Wichita State University is used to make this decision. This appears to have not been done for this project.
Guarantee for a proportional share of public revenue shortfall
This was not present in the developer agreement.
Economic analysis confirms that the project is infeasible “but for” public investment
This was not present in the developer agreement.
Minimum private to public capital investment ratio of 2 to 1
Information necessary to make this judgment was not included in the agenda presentation.
The incentives policy states: “Pro Forma — The project pro forma will be evaluated on the following criteria:
a. Rate of private investment return
b. Rents/prices consistent with performance of comparables
c. Projected rate of absorption consistent with performance of comparables
d. Long-term project solvency”
It appears that this analysis was not performed.
“Gap” Financing Requirement
The downtown incentives policy states: “Approval of Downtown Development Incentives will require a financial analysis demonstrating that the project would not otherwise be possible without the use of the requested development incentive (“gap” analysis). Parties requesting Downtown Development Incentives will be required to provide the City pro forma cash flow analyses and sources and uses of funds in sufficient detail to demonstrate that reasonably available conventional debt and equity financing sources are not available to fund the entire cost of the project and still provide the developer a reasonable market rate of return on investment.”
There is no evidence that this analysis was performed and made available to the council.
The incentives policy contains a loophole. If the council believes it is “inappropriate to evaluate a particular request for Downtown Development Incentives” using the policy, it may vote to waive the requirements.
To protect itself against self-defeating appeals of property valuation in tax increment financing districts, the City of Wichita once included a protective clause in developer agreements. But this consideration is not present in two proposed agreements.
When the Wichita Eagle reported that a downtown developer represented himself as an agent of the city in order to cut his taxes on publicly owned property he leases in the Old Town Cinema Plaza, city officials were not pleased.
The property in question is located in a tax increment financing district. Incremental tax revenue from the property is earmarked for paying off bonds that were issued for the property’s benefit. If tax revenue is reduced from original projections — perhaps because the tax valuation was appealed — the tax revenue might be insufficient to pay the bonds. City taxpayers are then on the hook.
This is what happened, according to later Eagle reporting: “A special tax district formed by Wichita to assist in the development of the Old Town cinema project can’t cover its debt payments because the developers — including the city itself — petitioned a state court and got their property taxes reduced, records show.”
This week the Wichita city council considers approving a project plan for part of a TIF district in Old Town, the Mosley Avenue Project. It’s contained within the Old Town Cinema Redevelopment District, a tax increment financing (TIF) district. The developer is Mosley Investments, LLC, a development group comprised of David Burk and Steve Barrett, according to city documents.
The involvement of Burk and Barrett is problematic. The downtown developer who the Wichita Eagle said represented himself as an agent of the city without the city’s knowledge or consent was David Burk. Barrett was a partner on the project.
To protect itself when Burk was involved in another TIF-financed project in 2011, the city added language to the developer agreement that prevented appeals of tax valuation, although there was a large loophole included.
But for the Mosley project, there is no such language prohibiting appeals of tax valuation. For another TIF project plan the city will consider the same day, the Union Station project, there is also no such language.
A question posed to city hall but not yet answered is this: Is lack of taxpayer protection an oversight, or is it by design?
More importantly, who in city hall looking out for the interests of taxpayers? Could the generous campaign contributions of Burk and his wife be a factor in this missing taxpayer protection? Or the generous contributions of Key Construction and its executives? (Key Construction is frequently used by Burk.)
Past action by Burk on property in TIF district
In February 2010 the Wichita Eagle reported on the activities of Burk with regard to property he owns in Old Town. Citizens reading these articles might have been alarmed at his actions. Certainly some city hall politicians and bureaucrats were.
The opening sentence of the Wichita Eagle article (Developer appealed taxes on city-owned property) raises the main allegation against Burk: “Downtown Wichita’s leading developer, David Burk, represented himself as an agent of the city — without the city’s knowledge or consent — to cut his taxes on publicly owned property he leases in the Old Town Cinema Plaza, according to court records and the city attorney.”
A number of Wichita city hall officials were not pleased with Burk’s action. According to the Eagle reporting, Burk was not authorized to do what he did: “Officials in the city legal department said that while Burk was within his rights to appeal taxes on another city-supported building in the Cinema Plaza, he did not have authorization to file an appeal on the city-owned parking/retail space he leases. … As for Burk signing documents as the city’s representative, ‘I do have a problem with it,’ said City Attorney Gary Rebenstorf, adding that he intends to investigate further.”
Council member Jeff Longwell was quoted by the Eagle: “‘We should take issue with that,’ he said. ‘If anyone is going to represent the city they obviously have to have, one, the city’s endorsement and … two, someone at the city should have been more aware of what was going on. And if they were, shame on them for not bringing this to the public’s attention.'”
Council member Lavonta Williams was not pleased, either: “‘Right now, it doesn’t look good,’ she said. ‘Are we happy about it? Absolutely not.'”
In a separate article by the Eagle on this issue, we can learn of the reaction by two other city hall officials: “Vice Mayor Jim Skelton said that having city development partners who benefit from tax increment financing appeal for lower property taxes ‘seems like an oxymoron.’ City Manager Robert Layton said that anyone has the right to appeal their taxes, but he added that ‘no doubt that defeats the purpose of the TIF.'”
The manager’s quote is most directly damaging. In the most common form of a tax increment financing (TIF) district, the city borrows money to pay for things that directly enrich the developers, in this case Burk and his partners. Then their increased property taxes — taxes they have to pay anyway — are used to repay the borrowed funds. In essence, a TIF district allows developers to benefit exclusively from their property taxes. For everyone else, their property taxes go to fund the city, county, school district, state, fire district, etc. But not so for property in a TIF district.
This is what is most astonishing about Burk’s action: Having been placed in a rarefied position of receiving many millions in benefits, he still thinks his own taxes are too high.
In response to Burk’s action, the city included a special provision in the agreement for a project in which Burk was involved the next year. This project is the Ambassador Hotel, known at the time as the Douglas Place project. This project is also located within a TIF district and receives the benefit of TIF financing. City documents explained that protests of taxes would not be allowed, but there is a loophole: “In addition, the Developer agrees not to protest the taxes on the building unless the valuation reflects a capitalization rate that exceeds the average rate for boutique hotels as determined by a nationally-recognized hotel appraisal firm.” (Wichita City Council agenda packet, September 13, 2011, page 26.) The agreement and the loophole were expressed in more detail in the agreement on page 138 of the same document.
At the time, city manager Layton told the Wichita Eagle that taxpayers would be protected in future deals: “We’ve taken several safeguards based on the city’s development experience over the last few years, as well as the advice from Goody Clancy and their business partners based on their experience.” He added “We think we’re set to encourage downtown development in a way that provides protection to the taxpayer.”
Now this week Dave Burk comes again before the city council asking for TIF money. But there appears to be nothing in the current agreement to protect taxpayers, as there was in the Douglas Place agreement.
Curiously, Burk is not mentioned by name in the documents prepared for the public hearing on January 6.
Tax increment financing disrupts the usual flow of tax dollars, routing funds away from cash-strapped cities, counties, and schools back to the TIF-financed development. TIF creates distortions in the way cities develop, and researchers find that the use of TIF means lower economic growth.
How TIF works
A TIF district is a geographically-defined area. In Kansas cities establish the borders. After the TIF district is defined, cities then approve one or more project plans that authorize the spending of TIF funds in specific ways.
Before the formation of the TIF district, the property pays taxes to the city, county, school district, and state as can be seen in figure 1. Because property considered for TIF is purportedly blighted, the amount of tax paid is usually small. Whatever it is, that level is called the “base.”
After approval of one or more TIF project plans the city borrows money and gives it to the project or development. The city now has additional debt in the form of TIF bonds that require annual payments. Figure 2 illustrates. (There is now another form of TIF known as “pay-as-you-go” that works differently, but produces much the same economic effect.)
Figure 3 shows the flow of tax revenue after the formation of the TIF district and after the completion of a project or development. Because buildings were built or renovated, the property is worth more, and the property tax is now higher. The development now has two streams of property tax payments that are handled in different ways. The original tax — the “base” — is handled just like before, distributed to city, state, school district, and the state, according to their mill levy rates. The difference between the new tax and the base tax — the “increment” — is handled differently. It goes to only two destinations: The State of Kansas, and repayment of the TIF bonds.
Figure 4 highlights the difference in the flow of tax revenues. The top portion of the illustration shows development outside of TIF. We see the flows of tax payments to city, county, school district, and the state. In the bottom portion, which shows development under TIF, the tax flows to city, county, and school district are missing. No longer does a property contribute to the support of these three units of government, although the property undoubtedly requires the services of them. This is especially true for a property in Old Town, which consumes large amounts of policing.
(Cities, counties, and school districts still receive the base tax payments, but these are usually small, much smaller than the incremental taxes. In non-TIF development, these agencies still receive the base taxes too, plus whatever taxes result from improvement of the property — the “increment,” so to speak. Or simply, all taxes.)
This rerouting of property taxes under TIF goes against the grain of the way taxes are usually rationalized. We use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from benefiting from police protection.
So when we pay property tax — or any tax, for that matter — people may be comforted knowing that it goes towards police and fire protection, street lights, schools, and the like. (Of course, some is wasted, and government is not the only way these services, especially education, could be provided.)
But TIF is contrary to this justification of taxes. TIF allows property taxes to be used for one person’s (or group of persons) exclusive benefit. This violates the principle of broad-based taxation to pay for an array of services for everyone. Remember: What was the purpose of the TIF bonds? To pay for things that benefited the development. Now, the development’s property taxes are being used to repay those bonds instead of funding government.
One more thing: Defenders of TIF will say that the developers will pay all their property taxes. This is true, but only on a superficial level. We now see that the lion’s share of the property taxes paid by TIF developers are routed back to them for their own benefit.
It’s only infrastructure
In their justification of TIF in general, or specific projects, proponents may say that TIF dollars are spent only on allowable purposes. Usually a prominent portion of TIF dollars are spent on infrastructure. This allows TIF proponents to say the money isn’t really being spent for the benefit of a specific project. It’s spent on infrastructure, they say, which they contend is something that benefits everyone, not one project specifically. Therefore, everyone ought to pay.
This attitude is represented by a comment left at Voice for Liberty, which contended: “The thing is that real estate developers do not invest in public streets, sidewalks and lamp posts, because there would be no incentive to do so. Why spend millions of dollars redoing or constructing public streets when you can not get a return on investment for that”
This perception is common: that when we see developers building something, the City of Wichita builds the supporting infrastructure at no cost to the developers. But it isn’t quite so. About a decade ago a project was being developed on the east side of Wichita, the Waterfront. This project was built on vacant land. Here’s what I found when I searched for City of Wichita resolutions concerning this project:
Note specifically one item: $1,672,000 for the construction of Waterfront Parkway. To anyone driving or walking in this area, they would think this is just another city street — although a very nicely designed and landscaped street. But the city did not pay for this street. Private developers paid for this infrastructure. Other resolutions resulted in the same developers paying for street lights, traffic signals, sewers, water pipes, and turning lanes on major city streets. All this is infrastructure that we’re told real estate developers will not pay for. But in order to build the Waterfront development, private developers did, with a total cost of these projects being $3,334,500. (It’s likely I did not find all the resolutions and costs pertaining to this project, and more development has happened since this research.)
In a TIF district, these things are called “infrastructure” and will be paid for by the development’s own property taxes — taxes that must be paid in any case. Outside of TIF districts, developers pay for these things themselves.
If not for TIF, nothing will happen here
Generally, TIF is justified using the “but-for” argument. That is, nothing will happen within a district unless the subsidy of TIF is used. Paul F. Byrne explains:
“The but-for provision refers to the statutory requirement that an incentive cannot be awarded unless the supported economic activity would not occur but for the incentive being offered. This provision has economic importance because if a firm would locate in a particular jurisdiction with or without receiving the economic incentive, then the economic impact of offering the incentive is non-existent. … The but-for provision represents the legislature’s attempt at preventing a local jurisdiction from awarding more than the minimum incentive necessary to induce a firm to locate within the jurisdiction. However, while a firm receiving the incentive is well aware of the minimum incentive necessary, the municipality is not.”
It’s often thought that when a but-for justification is required in order to receive an economic development incentive, financial figures can be produced that show such need. Now, recent research shows that the but-for justification is problematic. In Does Chicago’s Tax Increment Financing (TIF) Programme Pass the ‘But-for’ Test? Job Creation and Economic Development Impacts Using Time-series Data, author T. William Lester looked at block-level data regarding employment growth and private real estate development. The abstract of the paper describes:
“This paper conducts a comprehensive assessment of the effectiveness of Chicago’s TIF program in creating economic opportunities and catalyzing real estate investments at the neighborhood scale. This paper uses a unique panel dataset at the block group level to analyze the impact of TIF designation and investments on employment change, business creation, and building permit activity. After controlling for potential selection bias in TIF assignment, this paper shows that TIF ultimately fails the ‘but-for’ test and shows no evidence of increasing tangible economic development benefits for local residents.” (emphasis added)
In the paper, the author clarifies:
“To clarify these findings, this analysis does not indicate that no building activity or job crea-tion occurred in TIFed block groups, or resulted from TIF projects. Rather, the level of these activities was no faster than similar areas of the city which did not receive TIF assistance. It is in this aspect of the research design that we are able to conclude that the development seen in and around Chicago’s TIF districts would have likely occurred without the TIF subsidy. In other words, on the whole, Chicago’s TIF program fails the ‘but-for’ test.
Later on, for emphasis:
“While the findings of this paper are clear and decisive, it is important to comment here on their exact extent and external validity, and to discuss the limitations of this analysis. First, the findings do not indicate that overall employment growth in the City of Chicago was negative or flat during this period. Nor does this research design enable us to claim that any given TIF-funded project did not end up creating jobs. Rather, we conclude that on-average, across the whole city, TIF was unsuccessful in jumpstarting economic development activity — relative to what would have likely occurred otherwise.” (emphasis in original)
The author notes that these conclusions are specific to Chicago’s use of TIF, but should “should serve as a cautionary tale.”
The paper reinforces the problem of using tax revenue for private purposes, rather than for public benefit: “Essentially, Chicago’s extensive use of TIF can be interpreted as the siphoning off of public revenue for largely private-sector purposes. Although, TIF proponents argue that the public receives enhanced economic opportunity in the bargain, the findings of this paper show that the bargain is in fact no bargain at all.”
TIF is social engineering
TIF represents social engineering. By using it, city government has decided that it knows best where development should be directed. In particular, the Wichita city council has decided that Old Town and downtown development is on a superior moral plane to other development. Therefore, we all have to pay higher taxes to support this development. What is the basis for saying Old Town developers don’t have to pay for their infrastructure, but developers in other parts of the city must pay?
TIF doesn’t work
Does TIF work? It depends on what the meaning of “work” is.
If by working, do we mean does TIF induce development? If so, then TIF usually works. When the city authorizes a TIF project plan, something usually gets built or renovated. But this definition of “works” must be tempered by a few considerations.
Does TIF pay for itself?
First, is the project self-sustaining? That is, is the incremental property tax revenue sufficient to repay the TIF bonds? This has not been the case with all TIF projects in Wichita. The city has had to bail out two TIFs, one with a no-interest and low-interest loan that cost city taxpayers an estimated $1.2 million.
The verge of corruption
Second, does the use of TIF promote a civil society, or does it lead to cronyism? Randal O’Toole has written:
“TIF puts city officials on the verge of corruption, favoring some developers and property owners over others. TIF creates what economists call a moral hazard for developers. If you are a developer and your competitors are getting subsidies, you may simply fold your hands and wait until someone offers you a subsidy before you make any investments in new development. In many cities, TIF is a major source of government corruption, as city leaders hand tax dollars over to developers who then make campaign contributions to re-elect those leaders.”
We see this in Wichita, where the regular recipients of TIF benefits are also regular contributors to the political campaigns of those who are in a position to give them benefits. The corruption is not illegal, but it is real and harmful, and calls out for reform. See In Wichita, the need for campaign finance reform.
The effect of TIF on everyone
Third, what about the effect of TIF on everyone, that is, the entire city or region? Economists have studied this matter, and have concluded that in most cases, the effect is negative.
An example are economists Richard F. Dye and David F. Merriman, who have studied tax increment financing extensively. Their article Tax Increment Financing: A Tool for Local Economic Development states in its conclusion:
“TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.”
So TIF districts are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:
“If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.
We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.” (emphasis added)
In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.” (emphasis added)
The Wichita city council is concerned about creating jobs, and is easily swayed by the promises of developers that their establishments will create jobs. Paul F. Byrne of Washburn University has examined the effect of TIF on jobs. His recent report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and in its abstract we find this conclusion regarding the impact of TIF on jobs:
“This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.” (emphasis added)
These studies and others show that as a strategy for increasing the overall wellbeing of a city, TIF fails to deliver prosperity, and in fact, causes harm.
In 2009 the City of Wichita entered into an ambiguous agreement to grant a forgivable loan, and then failed to follow its own agreement. Worse yet, there has been no improvement to similar contracts. Such agreements empower the city to grant favor at its discretion.
In 2009 the City of Wichita granted a forgivable loan of $25,000 to a company named Premier Processing. In a separate transaction, Sedgwick County did the same. A forgivable loan starts with a grant of cash to a company. The company agrees to conditions or benchmarks, commonly to employ a certain number of people for the period of the loan, usually five years. If these benchmarks are met, the company does not need to repay the loan or any interest. Hence, “forgivable.” If benchmarks are not met, contracts may have “clawback” provisions that are designed to protect taxpayers from the effects of a bad investment in an economic development incentive.
Unfortunately, Premier Processing was not able to meet the conditions of the loan, and at the end of the five year loan period, it repaid the loan principal to both the city and county. That was due to a clawback provision contained in the loan contract.
But the loan contract is confusing. The loan contract, as explained below, appears to call for the payment of interest in case the company is not able to meet the benchmarks. But the city doesn’t interpret the contract that way.
Further, a person reading the contract could reasonably assume that the performance of the company compared to the benchmarks is evaluated each year, and clawback provisions enforced at that time if needed. But that is not the city’s interpretation of the contract.
Is this confusing? Yes, it is. And things haven’t improved. A forgivable loan made by the city last month holds the same language, and also the same potential for confusion.
Clawbacks are problematic. When a company has not achieved its benchmarks, it is likely because the company is not performing well financially and economically. So the company may not have the capacity to make the clawback payments. If a company is struggling financially, aggressively pursuing clawbacks might be the factor that forces a company to shut down. That means fewer jobs. Would it be better to let the company retain its incentives and the city forgo enforcement of clawbacks, even though the company hasn’t met the benchmarks? It is presumably providing some good, after all.
There’s also the consideration that if clawback provisions are strict and cities boast that they will aggressively pursue clawback payments, will companies be discouraged from applying for incentives?
Finally, during the sales tax campaign we were promised greater transparency of economic development activities if the sales tax passed. If transparency would be good in that case, it is also good right now, and should have been provided in the past. But the city made no effort to let citizens know of this episode in our economic development history. In fact, obtaining information about this matter has been difficult.
The confusing loan contract
The relevant pages of the city council agenda packet from August 2009, including the contract controlling the terms of the loan, may be viewed here. Of note is the schedule of forgiveness of debt.
Here’s a table of yearly employment benchmarks as supplied by Sedgwick County. (The city was not willing to produce the data it had regarding this.)
(Note: In the 2009 agreement, for cumulative wages promised in 2013, the city document has the value $3,618,000. In the data from the county, $2,615,000 is used. The city’s number is probably a typographical error, as the county-supplied number is more in line with a smooth progression from year to year. In either case, actual cumulative wages were less, which is the controlling factor. The amount by which the benchmark was missed does not figure into the calculation.)
In the “FORGIVABLE LOAN AGREEMENT and PROMISSORY NOTE” dated August 11, 2009, Section 2 creates a schedule of employment and wage goals, as shown above. This section also establishes the “first anniversary date” as being August 11, 2010. It also speaks of “each scheduled anniversary thereafter.” Using the customary meaning of “anniversary” that seems to establish August 11 for each succeeding year as an anniversary date.
Section (16) (a) (i) of the agreement holds this language: “If, on the scheduled anniversary, employment levels are below the minimums specified in item (2) of this Agreement, the following repayment is required within thirty (30) days:
a) the outstanding principal balance will be divided by the number of remaining anniversary dates, to produce the principal amount due, plus
b) interest accrued since the previously scheduled anniversary date.”
Looking at the plain meaning of section 16, it seems like for each anniversary date the city would perform this analysis: Based on the calculation specified in section (16) (a) (i), on the 2010 anniversary date, first, calculate “outstanding principal balance will be divided by the number of remaining anniversary dates, to produce the principal amount due.” This calculation is $25,000 / 4 = $6,250.
Then calculate “interest accrued since the previously scheduled anniversary date.” Section 16 (A) (iv) (a) gives 12 percent as the interest rate to be applied in case of default. 12 percent of $6,250 is $750.
Based on the default condition that existed on the first anniversary date, the borrower should have repaid $6,250 + $750 = $7,000. Similar calculations could be made for the following anniversary dates, as on each date the borrower was in default.
But this is not what happened. For one, the city did not collect interest. Correspondence with Tim Goodpasture of the city’s economic development office explained: “The company did not meet the stated objectives. The agreement states that if it does not it may have to repay the principal plus accrued interest. The interest rate defined in this agreement is 0.0% per annum.”
In a telephone call with Goodpasture, I explained my understanding of the contract with payments required on each anniversary date if benchmarks were not met. He said that the clawbacks were enforced. Since the company is still in operation in Wichita, no interest is due.
Goodpasture further explained that the city monitors performance each year. At the end of the loan period, the city looks back at the entire loan, examining year-by-year whether the terms were met. Since the company was not in compliance in any year, it repaid the entire loan. But since the company was still in operation in Wichita, there is no interest due, he explained.
It seems that the confusion derives from the meaning of “anniversary date.” The city seems to follow a policy that at the end of the loan period, which is five years in this case, there will be a retrospective examination that looks at employment levels on each anniversary date.
But the plain language of the contract says “If, on the scheduled anniversary, employment levels are below the minimums specified in item (2) of this Agreement, the following repayment is required within thirty (30) days.” (emphasis added) This seems to establish a yearly examination of the borrowing company, and if the benchmarks are not met, then repayment is required then (within 30 days). Not at the end of the loan term.
But there is this language in section 2 of the contract: “2) Forgiveness of Debt: The Borrower promises to create and maintain minimum employment levels at the Wichita, Kansas facility by August 11, 2014 as shown in the following schedule.” This seems to indicate an examination of the benchmarks at the end of the five-year loan period, which is what the city did. (Except it didn’t charge interest, which it the contract calls for.)
In this excerpt from WichitaLiberty.TV: Wichita government spending on economic development leads to imagined problems that require government intervention and more taxpayer contribution to resolve. The cycle of organic rebirth of cities is then replaced with bureaucratic management. Originally broadcast December 7, 2014. View below, or click here to view at YouTube.
For more on thiss issue, see City of Wichita State Legislative Agenda: Cultural Arts Districts.
Promises of transparency were made during the recent Wichita sales tax campaign. If the city cares about government transparency, the city should implement its campaign promises, even though the tax did not pass.
During the campaign for the one cent per dollar sales tax that Wichita voters rejected in November, a city document promised that if the tax passed “The process will be transparent, with reports posted online outlining expenditures and expected outcomes.”
The “Yes Wichita” campaign promised “Reports will be measured and reported publicly.”
These are good ideas. The city, county, and state should do these things.
They should do them even though the sales tax did not pass. But that hasn’t happened.
During September, during the heart of a campaign, I became aware of a Wichita company that received a forgivable loan from the City of Wichita, and a similar loan from Sedgwick County. The company was not able to meet the commitments required in the loan document, and was required to repay the loan.
Did you know this? Did either Sedgwick County or the City of Wichita make any effort to publicize this? This seems to be the type of information the city and the “Yes Wichita” campaign said would be provided if the sales tax passed. We were promised a website. If it’s good for citizens to have this type of information if the sales tax had passed, it’s good for them to know in any circumstance.
But neither governmental agency thought citizens needed to know about the company that was not able to meet the terms of its forgivable loan. There was no website, no press release. Nothing. My efforts to obtain the information from the city were met with resistance.
It’s not like the communications staffs are overwhelmed and have no time to provide this type of information. The county’s communications director starts each commission meeting with some sort of trivia contest or other prelude that contributes nothing except the waste of time. During the sales tax campaign Wichita city staff had time to prepare news releases with titles like “City to Compete in Chili Cook-off” and “Jerry Seinfeld Returns to Century II.”
A cynical person might conclude that transparency was dangled only to get people to vote for the sales tax, not as a governing principle.
Decisions on economic development initiatives in Wichita are made based on “stage one” thinking, failing to look beyond what is immediate and obvious.
Critics of the economic development policies in use by the City of Wichita are often portrayed as not being able to see and appreciate the good things these policies are producing, even though they are unfolding right before our very eyes. The difference is that some look beyond the immediate — what is seen — and ask “And then what will happen?” — looking for the unseen.
When we are talking about applied economic policies, we are no longer talking about pure economic principles, but about the interactions of politics and economics. The principles of economics remain the same, but the likelihood of those principles being applied unchanged is considerably reduced, because politics has its own principles and imperatives. It is not just that politicians’ top priority is getting elected and re-elected, or that their time horizon seldom extends beyond the next election. The general public as well behaves differently when making political decisions rather than economic decisions. Virtually no one puts as much time and close attention into deciding whether to vote for one candidate rather than another as is usually put into deciding whether to buy one house rather than another — or perhaps even one car rather than another.
The voter’s political decisions involve having a minute influence on policies which affect many other people, while economic decision-making is about having a major effect on one’s own personal well-being. It should not be surprising that the quantity and quality of thinking going into these very different kinds of decisions differ correspondingly. One of the ways in which these decisions differ is in not thinking through political decisions beyond the immediate consequences. When most voters do not think beyond stage one, many elected officials have no incentive to weigh what the consequences will be in later stages — and considerable incentives to avoid getting beyond what their constituents think and understand, for fear that rival politicians can drive a wedge between them and their constituents by catering to public misconceptions.
The economic decisions made by governing bodies like the Wichita City Council have a large impact on the lives of Wichitans. But as Sowell explains, these decisions are made by politicians for political reasons.
Sowell goes on to explain the danger of stopping the thinking process at stage one:
When I was an undergraduate studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what policy I favored on a particular issue of the times. Since I had strong feelings on that issue, I proceeded to answer him with enthusiasm, explaining what beneficial consequences I expected from the policy I advocated.
“And then what will happen?” he asked.
The question caught me off guard. However, as I thought about it, it became clear that the situation I described would lead to other economic consequences, which I then began to consider and to spell out.
“And what will happen after that?” Professor Smithies asked.
As I analyzed how the further economic reactions to the policy would unfold, I began to realize that these reactions would lead to consequences much less desirable than those at the first stage, and I began to waver somewhat.
“And then what will happen?” Smithies persisted.
By now I was beginning to see that the economic reverberations of the policy I advocated were likely to be pretty disastrous — and, in fact, much worse than the initial situation that it was designed to improve.
Simple as this little exercise may sound, it goes further than most economic discussions about policies on a wide range of issues. Most thinking stops at stage one.
We see stage one thinking all the time when looking at government. In Wichita, for example, a favorite question of city council members seeking to justify their support for government intervention such as a tax increment financing (TIF) district or some other form of subsidy is “How much more tax does the building pay now?” Or perhaps “How many jobs will (or did) the project create?”
These questions, and the answers to them, are examples of stage one thinking. The answers are easily obtained and cited as evidence of the success of the government program.
But driving by a store or hotel in a TIF district and noticing a building or people working at jobs does not tell the entire story. Using the existence of a building, or the payment of taxes, or jobs created, is stage one thinking, and nothing more than that.
Fortunately, there are people who have thought beyond stage one, and some concerning local economic development and TIF districts. And what they’ve found should spur politicians and bureaucrats to find ways to move beyond stage one in their thinking.
An example are economists Richard F. Dye and David F. Merriman, who have studied tax increment financing extensively. Their article Tax Increment Financing: A Tool for Local Economic Development states in its conclusion:
TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.
So TIF districts are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:
If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.
We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.
In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.”
Here we have an example of thinking beyond stage one. The results are opposite of what one-stage thinking produces.
Some city council members are concerned about creating jobs, and are swayed by the promises of developers that their establishments will employ a certain number of workers. Again, this thinking stops at stage one. But others have looked farther, as has Paul F. Byrne of Washburn University. The title of his recent report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and in its abstract we find this conclusion regarding the impact of TIF on jobs:
Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.
While this research might be used to support a TIF district for industrial development, TIF in Wichita is primarily used for retail development. And, when thinking beyond stage one, the effect on employment — considering the entire city — is negative.
It’s hard to think beyond stage one. It requires considering not only the seen, but also the unseen, as Frederic Bastiat taught us in his famous parable of the broken window. But over and over we see how politicians at all levels of government stop thinking at stage one. This is one of the many reasons why we need to return as much decision-making as possible to the private sector, and drastically limit the powers of politicians and governments.
The Wichita city council should repeal a law that the council doesn’t follow.
The mayor didn’t give a specific reason for recusing himself, but it’s probably because he was formerly an employee at Spirit. So it’s good that he did this. But if we’re going to observe ethics protocols like this — and we should — let’s go all the way. The mayor should have announced at the start of this agenda item that he had to recuse himself, and then he should have left the bench and probably also the council chambers. Instead, Brewer presided over the presentation and discussion of the item, and then stated he wouldn’t be voting. It’s a small matter, but we might as well do things right.
What is much more important — and equally difficult to understand — is this: Brewer feels he can’t vote on an item involving a company where he was an employee long ago, but he has no qualms about voting on matters that send taxpayer money to his fishing buddy, even through overpriced no-bid contracts.
Even more curious: Brewer thought it was ethical to vote to send taxpayer money to the movie theater owner who also sells his barbeque sauce.
Add this to the confusing mix of ethical judgments: The mayor feels he can’t shop for his personal automobile in Wichita because he doesn’t want to be accused of getting a “special deal,” in his words.
If someone can explain this line of reasoning by the mayor and/or the city, I’d appreciate being enlightened.
It’s good to know that Mayor Carl Brewer is concerned about ethical behavior when shopping for a car or voting on matters concerning his former employer. But I’m surprised, as this concern for virtue doesn’t match the behavior of the mayor and many members of the Wichita City Council. Shall we run down the list?
Exhibit 1: In August 2011 the Wichita City Council voted to award Key Construction a no-bid contract to build the parking garage that is part of the Ambassador Hotel project, now known as Block One. The no-bid cost of the garage was to be $6 million, according to a letter of intent. Later the city decided to place the contract for competitive bid. Key Construction won the bidding, but for a price $1.3 million less.
The no-bid contract for the garage was just one of many subsidies and grants given to Key Construction and Dave Burk as part of the Ambassador Hotel project. Both of these parties are heavy campaign contributors to nearly all city council members. Brewer and the head of Key Construction are apparently friends, embarking on fishing expeditions.
What citizens need to know is that Brewer and the Wichita City Council were willing to spend an extra $1.3 million of taxpayer money to reward a politically-connected construction firm that makes heavy campaign contributions to council members. Only one council member, Michael O’Donnell, voted against this no-bid contract. At the time, no city bureaucrats expressed concern about this waste of taxpayer money.
Exhibit 2: In July 2012 Brewer participated in a decision to award the large contract for the construction of the new Wichita airport to Key Construction, despite the fact that Key was not the low bidder. The council was tasked to act in a quasi-judicial manner, to make decisions whether discretion was abused or whether laws were improperly applied. Brewer’s judgment was in favor of Key Construction, even though its bid had the same defect as the lower bid. This decision cost taxpayers and airport users an extra $2 million, to the benefit of a major campaign donor and fishing buddy.
Exhibit 3: In a Wichita Eagle story that reported on “city-financed downtown parking garages that spiraled well over budget” we learned this: “The most recent, the 2008 WaterWalk Place garage built by Key Construction, an original partner in the WaterWalk project, came in $1.5 million over budget at almost $8.5 million. That’s the biggest parking garage miss, according to figures from the city’s office of urban development, although the 2004 Old Town Cinema garage built by Key Construction came in almost $1 million over budget at $5.225 million.”
Despite this personal experience, Brewer wrote a letter recommending Key Construction (and only Key), observing “Key is known for their consistent quality construction, budget control and on schedule delivery.”
Exhibit 4: In 2008 the Wichita City Council approved a no- and low-interest loan to movie theater owner Bill Warren and his partners. Reported the Wichita Eagle: “Wichita taxpayers will give up as much as $1.2 million if the City Council approves a $6 million loan to bail out the troubled Old Town Warren Theatre this week. That’s because that $6 million, which would pay off the theater’s debt and make it the only fully digital movie theater in Kansas, would otherwise be invested and draw about 3 percent interest a year.”
Warren’s theaters and other business ventures have received other financial benefits from the city under Brewer’s leadership, too. Then — and I swear I am not making this up — when Brewer started manufacturing and selling barbeque sauce, it was sold at Warren’s theaters.
Exhibit 5: Given all this, Mayor Brewer saw it fit to praise Wells and Burk at the city council meeting on December 16, 3014. Effusively praise the two, that is. Also, Bill Warren –the owner of the movie theater that sells the mayor’s barbeque sauce — is a partner in this apartment project.
Really. All this happened.
What can we say about a mayor who is concerned about the appearance of impropriety when voting on economic development incentives for his former employer, but is not able to understand the problems with his own behavior in office?
How can a person decide he must shop for a car outside the city, but votes for overpriced no-bid contracts for campaign contributors and friends?
Why would an elected official decline to vote on a tax break to his former employer, but votes to give millions to a campaign contributor, and then sells his barbeque sauce in that person’s business?
How can someone justify participating in a quasi-judicial hearing involving his campaign contributors and friend involving a large city contract?
It’s difficult to understand or reconcile these decisions.
We have a law, maybe
There is a law in Wichita. There is a city code that reads “[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.” Mayor Brewer voted for that law in 2008. But the former city attorney felt that council members did not need to follow that law.
When someone called attention to this law at a city council meeting when the mayor was about to award incentives to his fishing buddy, he threatened to sue the speaker. See Wichita Mayor Carl Brewer on public trust in government.
If the former city attorney’s interpretation of this law is correct and city council members do no need to follow this law, the city needs to do something. The council needs to repeal this section of the city code. There’s no need to have such a law if council members don’t have to obey. Also, someone who reads this — perhaps a business owner considering Wichita for expansion — might conclude that our city has a code of ethics that is observed by the mayor and council members and enforced by its attorneys. But giving that impression would be false.
Those seeking favors from Wichita City Hall use campaign contribution stacking to bypass contribution limits. This has paid off handsomely for them, and has harmed everyone else.
Not long ago a person who is politically active wrote a letter that was published in the Wichita Eagle. It criticized the role of campaign contributions in federal elections, noting “Corporations don’t spend money on politics because they are patriotic; rather, the companies expect a financial return.” Later the letter held this: “Locally, I understand that elections for the Wichita City Council underwent ideal, nonpartisan campaign-finance reform years ago, and that these limits are scrupulously practiced.”
The writer is correct, but only superficially. Our campaign contribution limits for city and school board offices are relatively small. What we find, however, is that the cronies, that is, the people who want stuff from city hall, stack contributions using family members and employees.
Here’s how a handful of cronies stack campaign contributions. In 2012 council members James Clendenin (district 3, southeast and south Wichita) and Lavonta Williams (district 1, northeast Wichita) were preparing to run again for their offices in spring 2013. Except for $1.57 in unitemized contributions to Clendenin, two groups of related parties accounted for all contributions received by these two incumbents for an entire year. A group associated with Key Construction gave a total of $7,000 — $4,000 to Williams, and $3,000 to Clendenin. Another group of people associated with movie theater owner Bill Warren gave $5,000, all to Clendenin.
The casual observer wouldn’t realize this stacking of campaign contributions by looking at campaign finance reports. That’s because for city offices, the name of the company a contributor works for isn’t required. Industry and occupation are required, but these aren’t of much help. Further, contribution reports are not filed electronically, so the information is not easy to analyze. Some reports are even submitted using handwriting, and barely legible handwriting at that.
So it’s not easy to analyze campaign contributions for Wichita city offices. It takes a bit of effort to unpack the stacking. You have to see a name and investigate who that person is. When you do that, you might find that a man from Valley Center who list his occupation and industry as Manager and Aviation Subcontractor is married to someone who lists her occupation and industry as Director of Marketing. Investigating her reveals that she is an executive of Key Construction.
That company, Key Construction, is a prominent company in Wichita. It is an example of a company that seeks to earn outsized profits through the political system rather than by meeting customer needs in the market. Profits through cronyism, that is. Here’s an example. In August 2011 the Wichita city council voted to award Key Construction a no-bid contract to build the parking garage that is part of the Ambassador Hotel project, now known as Block One. The no-bid cost of the garage was to be $6 million, according to a letter of intent. Later the city decided to place the contract for competitive bid. Key Construction won the bidding, but for a price $1.3 million less.
Let me make sure you understand that. Mayor Carl Brewer, Lavonta Williams, and James Clendenin were willing to spend an extra $1.3 million of your tax money to reward their benefactors through a no-bid contract. Since then reforms have been implemented to prevent this. Hopefully the reforms will work. I am skeptical.
In 2012 there was another incident involving Key Construction that show the need for campaign finance reform. Key and another construction company were engaged in a dispute as to who should build the new Wichita airport. The city council was tasked to act in a quasi-judicial manner to decide the issue. Given all the campaign contributions Key was making at the time, and given the mayor’s well-known friendship with Dave Wells of Key Construction, can you guess who was awarded the contract? And can you guess whose contract was more expensive for taxpayers?
So back to the letter in the newspaper, which held: “Corporations don’t spend money on politics because they are patriotic; rather, the companies expect a financial return.” I’m not going to defend cronyism at the federal level. It exists and it is harmful. But I would like to let the writer of the letter know that cronyism also exists in Wichita city government. In fact, it may be worse in Wichita. At the federal level, Congress usually passes laws that benefit an entire industry — say the sugar industry or banks — to the detriment of consumers and taxpayers. (Sometimes the benefits are quite specific. American Enterprise Institute reports that the just-passed omnibus bill contains a section that provides protection from an Obamacare provision for exactly one entity: Blue Cross Blue Shield. Conservative writer Yuval Levin explained: “This section is, simply put, a special favor for Blue Cross/Blue Shield allowing them to count ‘quality improvement’ spending as part of the medical loss ratio calculation required of them under Obamacare. And it’s made retroactive for four years, saving them loads of money.”)
That’s bad enough. Here in Wichita, however, the cronyism is more concentrated and personal. The links between campaign contributions and handouts from city hall is much more direct. We should insist that the city council stop picking the pocket of your fellow man so it can give the proceeds to campaign contributors. Campaign finance reform can help.
The City of Wichita gives little notice regarding a public hearing, which does not contribute to an open and transparent government that welcomes citizen involvement.
As part of its meeting on December 16, the Wichita City Council will consider issuing a letter of intent for industrial revenue bonds. Whether the bonds are a good or bad idea, the process the city has used in conducting the required public hearing is not contributing to an open and transparent government that welcomes citizen involvement.
Kansas law requires that when cities or counties wish to issue industrial revenue bonds, there must be a public hearing (K.S.A. 12-1749d). Notice must be given.
The archives of The Wichita Eagle show that a legal publication was placed by the city on December 9 that gave notice of the December 16 item. But this notice, like most other legal notices, does not appear on the city’s website — a place where it would be much more useful. The city’s website is also where the city could make the notices available to citizens at very low cost to the city. The city’s website content is also available at no cost to citizens who already have internet access, unlike a subscription to The Wichita Eagle, although the Eagle advertisements are available to view without a subscription.
Here’s the problem that citizens face regarding the item on the December 16 agenda. For most people, the first awareness of this agenda item would have been on Friday December 12 at 2:33 pm. That’s when the agenda packet for this meeting was posted to the city’s website. If anyone had questions about the item, there is little time to resolve them between Friday afternoon and Tuesday morning. Of course, citizens could have inquired for details of the agenda item starting on December 9, when notice was published. But that would require inquiry to city officials, and it is not known if details were available at that time.
This is no way to hold a public hearing.
The city goes to great lengths to invite and solicit citizen involvement in city government. In the run-up to the recent sales tax election, the city continually reminded us of how many public meetings were held, how many surveys were filled out, and how we must come together as a community to solve our problems.
After the election Mayor Brewer started a press conference by, according to his published remarks, “thanking everyone who voted, participated in the community engagement process and took the time to learn about the sales tax proposal.” He also mentioned that the city would “expand and enhance our engagement process.”
But that’s not the case with this item. The notice that the city gave to citizens is deficient. Not legally deficient, but deficient if the city really wants citizens to be involved.
If the city is concerned about citizen involvement, the council should defer this item until next week or another future meeting.
A request to modify an agreement with the City of Wichita raises the question of why, finally, is the city dealing with an apparent oversight?
As I reported earlier this year:
Last year the Wichita City Council selected a development team to build apartments on the West Bank of the Arkansas River, between Douglas Avenue and Second Street. But city leaders may have overlooked a Wichita City Charter Ordinance that sets aside this land to be “open space, committed to use for the purpose of public recreation and enjoyment.”
This week the developers of the apartments seek city council approval of revisions to their plans. As part of the revision, city staff recommends that council approve a resolution that eliminates the restrictions on land use contained in Charter Ordinance No. 144. That ordinance provides that by a two-thirds vote of the council the restrictions may be reduced or eliminated.
A few questions come to mind.
First, Charter Ordinance No. 144, which the council may override, says that the property being used for the apartments “shall be hereafter restricted to and maintained as open space, committed to use for the purpose of public recreation and enjoyment.” Now that the council has turned over the property for private use, we may want to ask: Is this good public policy? The council will have to explicitly decide this issue. When the city conveyed the property without dealing with this ordinance, the issue was not discussed.
Second: Why only now is Charter Ordinance No. 144 and its restrictions being recognized? Why was this ordinance not recognized in August 2013 when the apartment project was approved by the city council? Part of the answer may be that the Wichita city attorney at that time has retired.
Third: If not for the request to modify the agreement would the conflict with Charter Ordinance No. 144 have been recognized? Would it have simply been ignored as an inconvenient rule that doesn’t really need to be followed, as it has been ignored for over one year?
The Wichita City Council can decide to disclose how taxpayer money is spent, or let it remain being spent in secret.
The City of Wichita has three surrogate quasi-governmental agencies that are almost totally taxpayer-funded, specifically Go Wichita Convention and Visitors Bureau, Wichita Downtown Development Corporation, and Greater Wichita Economic Development Coalition. Each agency contends it is not a “public agency” as defined in Kansas law, and therefore does not have to fulfill records requests.
These agencies spend considerable sums of tax money. This week the city will consider funding Go Wichita with a budget of $2,356,851 for 2015. That is not all the taxpayer money this agency will spend, as earlier this year the council voted to increase the city’s hotel tax by 2.75 cents per dollar, with the proceeds going to Go Wichita. City documents indicate that tax is estimated to generate $2.3 million per year.
That is a lot of tax money, and also a high proportion of the agency’s total funding. According to the 2012 IRS form 990 for Go Wichita, the organization had total revenue of $2,609,545. Of that, $2,270,288 was tax money from the city. That’s 87 percent taxpayer-funded. When the surge of higher hotel tax money starts flowing in, that percent will undoubtedly rise, perhaps to 93 percent or more.
Despite being nearly totally funded by taxes, Go Wichita refuses to supply spending records. Many believe that the Kansas Open Records Act requires that it comply with such requests. If the same money was being spent directly by the city, the records undoubtedly would be supplied.
I’ve appeared before the council several times to ask that Go Wichita and similar organizations comply with the Kansas Open Records Act. See Go Wichita gets budget approved amid controversy over public accountability, City of Wichita Spends $2 million, Rebuffs Citizen’s Transparency Request, and articles at Open Records in Kansas.
The lack of transparency at Go Wichita is more problematic than this. Earlier this year Go Wichita refused to provide to me its contract with a California firm retained to help with the re-branding of Wichita. When the Wichita Eagle later asked for the contract, it too was refused. If the city had entered into such a contract, it would be a public record. Contracts like this are published each week in the agenda packet for city council meetings. But Go Wichita feels it does not have to comply with simple transparency principles.
The City of Wichita could easily place conditions on the money it gives to these groups, requiring them to show taxpayers how their tax dollars are being spent. But the City does not do this. This is not transparency.
In the past I’ve argued that Go Wichita is a public agency as defined in the Kansas Open Records Act. But the city disagreed. And astonishingly, the Sedgwick County District Attorney agreed with the city’s interpretation of the law.
So let’s talk about good public policy. Let’s recognize that even it is the case that the Kansas Open Records Act does not require Go Wichita, WDDC, and GWEDC to disclose records, the law does not prohibit or prevent them from fulfilling requests for the types of records I’ve asked for. Even if the Sedgwick County District Attorney says that Go Wichita is not required to release documents, the law does not prevent the release of these records.
Once we understand this, we’re left with these questions:
Why does Go Wichita want to keep secret how it spends taxpayer money, as much as $4.6 million next year?
Why is this city council satisfied with this lack of disclosure of how taxpayer funds are spent? Many council members have spoken of how transparency is important. One said: “We must continue to be responsive to you. Building on our belief that government at all levels belongs to the people. We must continue our efforts that expand citizen engagement. … And we must provide transparency in all that we do.” That was Mayor Brewer speaking in his 2011 State of the City address.
It would be a simple matter for the council to declare that the city and its taxpayer-funded partner agencies believe in open government. All the city has to have is the will to do this. It takes nothing more. It costs the city and its agencies nothing, because the open records law lets government charge for filling records requests. I would ask, however, that in the spirit of open transparent government, in respect for citizens’ right to know how tax funds are spent, and as a way to atone for past misdeeds, that Go Wichita fulfill records requests at no charge.
Actions of the Wichita City Council have shown that campaign finance reform is needed. Citizen groups are investigating how to accomplish this needed reform, since the council has not shown interest in reforming itself.
Consider recent actions by the council and its members:
- The council voted to give a movie theater operator a no-interest and low-interest loan, after having already received the benefit of tax increment financing.
- A minister dabbling in real estate development made a large contribution to his council representative just before he asked the city council for tax increment financing.
- The council voted to give a construction company a no-bid contract for a parking garage. When later put out for competitive bid, the same company won the contract, but with a bid 21 percent less costly to taxpayers.
- Executives of a Michigan construction company made contributions to the campaign of a city council member just before and after the council voted to give the company and its local partner a huge construction contract.
- When a group of frequent campaign contributors wanted to win a contest for the right to build an apartment project, the city’s reference-checking process was a sham. City and other government officials were listed as references without their knowledge or consent, and none of the people listed as references were actually contacted.
- A frequent campaign contributor, according to the Wichita Eagle, “represented himself as an agent of the city — without the city ‘s knowledge or consent — to cut his taxes on publicly owned property he leases in the Old Town Cinema Plaza.” City officials expressed varying degrees of displeasure. But it wasn’t long before David Burk was receiving taxpayer subsidy again from the city council.
- The council voted to grant $703,017 in sales tax forgiveness to frequent campaign contributors and the mayor’s fishing buddy.
What is the common thread running through these incidents? Council members have voted to enrich their significant campaign contributors. Each of these are examples of a “pay-to-play” environment created at Wichita City Hall. It’s harmful to our city in a number of ways.
First, overpriced no-bid contracts and other giveaways to campaign contributors isn’t economic development. It’s cronyism. It’s wasteful.
Second: Citizens become cynical when they feel there is a group of insiders who get whatever they want from city hall at the expense of taxpayers. At one time newspaper editorial pages crusaded against cronyism like this. But no longer in Wichita. The Wichita Eagle has reported on some of these issues — sometimes in depth, sometimes in passing, but some have escaped notice. The editorial page of the newspaper sometimes takes notice, but is rarely critical of the council or mayor.
Third, when it is apparent that a “pay-to-play” environment exists at Wichita City Hall, it creates a toxic and corrosive political and business environment. Companies are reluctant to expand into areas where they don’t have confidence in the integrity of local government. Will I find my company bidding against a company that made bigger campaign contributions than I did? If I don’t make the right campaign contributions, will I get my zoning approved? Will my building permits be slow-walked through the approval process? Will my projects face unwarranted and harsh inspections? Will my bids be subjected to microscopic scrutiny?
Importantly: Will the Wichita city council prop up a competitor to my company with economic development incentives that place my company at severe disadvantage?
We need laws to prohibit Wichita city council members from voting on or advocating for decisions that enrich their significant campaign contributors. A model law for Wichita is a charter provision of the city of Santa Ana, in Orange County, California, which states: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”
We’d also need to add — as does New Jersey law — provisions that contributions from a business owner’s spouse and children will be deemed to be from the business itself. This is because for Kansas municipal and school district elections, only personal contributions may be made. Additionally the contributions of principals, partners, officers, and directors, and their spouses and children, are considered to be from the business itself for purposes of the law. These provisions are important, as many city council members in Wichita receive campaign contributions from business owners’ family members and employees as a way to skirt our relatively small contribution limits. For two examples of how companies use family members, employees, and friends to stack up campaign contributions, see Campaign contributions show need for reform in Wichita.
Such campaign finance reform would not prohibit anyone from donating as much as they want (up to the current limits) to any candidate. Nor would the law prevent candidates from accepting campaign contributions from anyone.
This reform, however, would remove the linkage between significant contributions and voting to give money to the contributor. This would be a big step forward for Wichita, its government, and its citizens.
Proponents see three paths towards campaign finance reform. One would be to press for a law in the upcoming session of the Kansas Legislature. Such a law would be statewide in scope, and could apply to city councils, county commissions, school boards, townships, and other elective bodies.
A second path would be to use the municipal initiative process. Under this process, a group writes a proposed ordinance. Then, it collects valid signatures on petitions. If a successful petition is verified, the city council must either (a) pass the ordinance as written, or (b) set an election to let the people vote whether the ordinance should become law.
There is also a third path, which is for the Wichita City Council to recognize the desirability of campaign finance reform and pass such an ordinance on its own initiative.
If we take the affected parties at their word, this third path should face little resistance. That’s because politicians who accept these campaign contributions say it doesn’t affect their voting, and those who give the contributions say they don’t do it to influence votes.
If politicians and contributors really mean what they say, there should be no opposition to such a law. Citizens should ask the Wichita City Council to pass a campaign finance reform ordinance that prohibits voting to enrich significant campaign contributors.
In 2008 the Wichita City Council approved a no- and low-interest loan to Bill Warren and his partners. Reported the Wichita Eagle: “Wichita taxpayers will give up as much as $1.2 million if the City Council approves a $6 million loan to bail out the troubled Old Town Warren Theatre this week. That’s because that $6 million, which would pay off the theater’s debt and make it the only fully digital movie theater in Kansas, would otherwise be invested and draw about 3 percent interest a year.”
When questioned about election donations:
“I would never do anything because of a campaign contribution,” said [former council member Sharon] Fearey, who received $500 from David Burk and $500 from David Wells.
“I don’t think $500 buys a vote,” said [former council member Sue] Schlapp.
“One has nothing to do with the other,” [Wichita Mayor Carl] Brewer said.
Also in 2008, the Reverend Dr. Kevass J. Harding wanted to spruce up the Ken-Mar shopping center at 13th and Oliver, now known as Providence Square. Near the end of June, Kevass Harding and his wife contributed a total of $1,000, the maximum allowed by law, to the campaign of Wichita City Council Member Lavonta Williams (district 1, northeast Wichita). This was right before Harding appeared before the city council in July and August as an applicant for tax increment district financing (TIF).
These campaign contributions, made in the maximum amount allowable, were out of character for the Hardings. They had made very few contributions to political candidates, and they appear not to have made many since then.
But just before the Ken-Mar TIF district was to be considered for approval, the Hardings made large contributions to Williams, who is the council member representing Ken-Mar’s district. Harding would not explain why he made the contributions. Williams offered a vague and general explanation that had no substantive meaning.
In August 2011 the council voted to award Key Construction a no-bid contract to build the parking garage that is part of the Ambassador Hotel project, now known as Block One. The no-bid cost of the garage was to be $6 million, according to a letter of intent. Later the city decided to place the contract for competitive bid. Key Construction won the bidding, but for a price $1.3 million less.
The no-bid contract for the garage was just one of many subsidies and grants given to Key Construction and Dave Burk as part of the Ambassador Hotel project. In Wichita city elections, individuals may contribute up to $500 to candidates, once during the primary election and again during the general election. As you can see in this table compiled from Wichita City Council campaign finance reports, spouses often contribute as well. So it’s not uncommon to see the David and DJ Burk family contribute $2,000 to a candidate for their primary and general election campaigns. That’s a significant sum for a city council district election campaign cycle. Click here for a compilation of campaign contributions made by those associated with the Ambassador Hotel project.
Council Member Jeff Longwell (district 5, west and northwest Wichita), in his second term as council member, led the pack in accepting campaign contributions from parties associated with the Ambassador Hotel project. For his most recent election, he received $4,000 from parties associated with Key Construction, and $2,000 from David Burk and his wife. Total from parties associated with the Ambassador Hotel project: $6,000. When Longwell ran for Sedgwick County Commission this summer, these parties donated generously to that campaign, too.
Council Member Lavonta Williams (district 1, northeast Wichita) received $5,000 from parties associated with the Ambassador Hotel: $3,000 from parties associated with Key Construction, and $2,000 from David Burk and his wife.
Wichita Mayor Carl Brewer received $5,000 from parties associated with the Ambassador Hotel: $4,500 from parties associated with Key Construction, and $500 DJ Burk, David Burk’s wife.
Council Member and Vice Mayor Janet Miller (district 6, north central Wichita) received $3,500 during her 2009 election campaign from parties associated with the Ambassador Hotel: $1,500 from parties associated with Key Construction, and $2,000 from David Burk and his wife.
For his 2011 election campaign, Council Member Pete Meitzner (district 2, east Wichita) received $3,500 from parties associated with the Ambassador Hotel: $2,500 from parties associated with Key Construction, and $1,000 from David Burk and his wife.
For his 2011 election campaign, Council Member James Clendenin (district 3, southeast and south Wichita) received $1,500 from parties associated with the Ambassador Hotel: $1,000 from parties associated with Key Construction, and $500 from David Burk and his wife.
What citizens need to know is that the Wichita City Council was willing to spend an extra $1.3 million of taxpayer money to reward a politically-connected construction firm that makes heavy campaign contributions to council members. Only one council member, Michael O’Donnell, voted against this no-bid contract. No city bureaucrats expressed concern about this waste of taxpayer money.
Of interest to current mayoral politics: In 2012 while Jeff Longwell was campaigning for the Sedgwick County Commission, campaign contributions from parties associated with Walbridge, a Michigan-based construction company appeared on Longwell’s campaign finance reports. Why would those in Michigan have an interest in helping a Wichita City Council member fund his campaign for a county office? Would the fact that Walbridge is a partner with Key Construction on the new Wichita Airport terminal provide a clue?
These contributions are of interest because on July 17, 2012, the Wichita City Council, sitting in a quasi-judicial capacity, made a decision in favor of Key and Walbridge that will cost some group of taxpayers or airport customers an extra $2.1 million. Five council members, including Longwell, voted in favor of this decision. Two members were opposed.
On July 16 — the day before the Wichita City Council heard the appeal that resulted in Key Construction apparently winning the airport contract — John Rakolta, Chairman and Chief Executive Officer of Walbridge and his wife contributed $1,000 to Longwell’s campaign for Sedgwick county commissioner.
Then on July 20, three days after the council’s decision in favor of Key/Walbridge, other Walbridge executives contributed $2,250 to Longwell’s campaign. Besides the Walbridge contributions, Key Construction and its executives contributed $6,500 to Longwell’s county commission campaign. Key and its executives have been heavy contributors to Longwell’s other campaigns, as well as to Wichita Mayor Carl Brewer and many other Wichita City Council members.
Wichita has laws that seem clear. But the city attorney said they don’t mean what they seem to say. Will our next mayor stand up for ethics?
Wichita has a city code that seems to give guidance to council members (the mayor is a council member) on ethical behavior. The code says, in part, “[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.”
But Mayor Carl Brewer and many council members have done just that. Many times, in fact. And the Wichita city attorney said that the city code doesn’t really need to be followed.
Be advised: If you ask the mayor to adhere to this law, he may threaten to sue you.
Following, from July 2013, what Wichita city code says and what the city attorney said about that law. We have a new city attorney this year, so maybe things will change. But I have a feeling that change must be started from the top, which is the mayor. The city attorney, indirectly, works for the mayor and council.
Wichita city code seemingly ignored
When a city has laws that it doesn’t enforce, what are citizens to do?
Here’s a section from the Wichita city code as passed in 2008 (full section below):
“[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.”
When asked about a specific application of this city law, the Wichita city attorney supplied this interpretation:
Related to the Mayor’s participation in the item, yes, City Code advises Council members to “refrain from making decisions involving business associates, customers, clients, friends and competitors. … ” but the Code does not provide definitions or limits to these broad categories of constituents. Further, the City Code clearly requires Council members to “vote on all matters coming before the City Council except in those particular cases of conflict of interest. …” The city Code does not define what constitutes a conflict but the Council has historically applied the State law for that definition.
Applying that State law specific to local municipalities, the Mayor does not have any substantial interest in Douglas Place LLC, and therefore no conflict. Under the State ethics law, there was no requirement that the Mayor recuse himself from voting on the Ambassador Project.
So we have statutory language that reads “shall refrain,” but the city attorney interprets that to mean “advises.”
We also have statutory language that reads “business associates, customers, clients, friends and competitors.” But the city attorney feels that these terms are not defined, and therefore the mayor and city council members need not be concerned about compliance with this law.
I wonder whose interests the city attorney represents. The people of Wichita, who want to be governed in a fair and ethical manner? It doesn’t seem so.
If the city attorney’s interpretation of this law is controlling, I suggest we strike this section from the city code. Someone who reads this — perhaps a business owner considering Wichita for expansion — might conclude that our city has a code of ethics that is observed by the mayor and council members and enforced by its attorneys.
Giving that impression, though, would be false — and unethical.
Here’s the Wichita city code:
Sec. 2.04.050. — Code of ethics for council members.
Council members occupy positions of public trust. All business transactions of such elected officials dealing in any manner with public funds, either directly or indirectly, must be subject to the scrutiny of public opinion both as to the legality and to the propriety of such transactions. In addition to the matters of pecuniary interest, council members shall refrain from making use of special knowledge or information before it is made available to the general public; shall refrain from making decisions involving business associates, customers, clients, friends and competitors; shall refrain from repeated and continued violation of city council rules; shall refrain from appointing immediate family members, business associates, clients or employees to municipal boards and commissions; shall refrain from influencing the employment of municipal employees; shall refrain from requesting the fixing of traffic tickets and all other municipal code citations; shall refrain from seeking the employment of immediate family members in any municipal operation; shall refrain from using their influence as members of the governing body in attempts to secure contracts, zoning or other favorable municipal action for friends, customers, clients, immediate family members or business associates; and shall comply with all lawful actions, directives and orders of duly constituted municipal officials as such may be issued in the normal and lawful discharge of the duties of these municipal officials.
Council members shall conduct themselves so as to bring credit upon the city as a whole and so as to set an example of good ethical conduct for all citizens of the community. Council members shall bear in mind at all times their responsibility to the entire electorate, and shall refrain from actions benefiting special groups at the expense of the city as a whole and shall do everything in their power to ensure equal and impartial law enforcement throughout the city at large without respect to race, creed, color or the economic or the social position of individual citizens.
The evaluation of economic development incentives requires thinking at the margin, not the entirety.
When considering the effect of economic development incentives, cities like Wichita use a benefit-cost analysis to determine whether the incentive is in the best interests of the city. The analysis usually also considers the county, state, and school districts, although these jurisdictions have no say over whether the incentive is granted, with a few exceptions. The idea is that by paying money now or forgiving future taxes, the city gains even more in increased tax collections. This is then pitched as a good deal for taxpayers: The city gets more jobs (usually) and a profit, too.
Economic activity usually generates tax revenue that flows to governmental agencies. When people work, they pay income taxes. When they buy stuff, they pay sales taxes. When they create new property, it is taxed. This happens whether or not the economic activity is a result of government incentive.
When calculating benefit-cost ratios, government takes credit for the increase in tax revenue from a company receiving economic development incentives. Government often says that without the incentive, the company would not have located in Wichita. Or, without the incentive, it would not have expanded in Wichita. Now, it is claimed that incentives are necessary to persuade companies to consider remaining in Wichita rather than moving somewhere else.
But there are a few problems with the arguments that cities and their economic development agencies promote. One is that the increase in tax revenue happens regardless of whether the company has received incentives. What about all the companies that locate to or expand in Wichita without receiving incentives? How do we calculate the benefit-cost ratio when a company receives no incentives? The answer is it can’t be calculated, as there is no government cost. Instead, there is only benefit.
Then, we don’t often ask why do some companies need incentives, and others do not? Do the companies that receive incentives really need them? Why do some companies receive incentives multiple times?
Related is that jurisdictions may grant relatively small incentives and then take credit for the entire deal. I’ve been told that when economic development agencies learn of a company moving to an area or expanding their Wichita operations, they swoop in with small incentives and take credit for the entire deal. The agency is then able to point to a small incentive and take credit for the entire deal. As you can imagine, it’s difficult to get the involved parties to speak on the record about this.
Further, governments may not credit the contribution of other governments. In the past when the Wichita economic development office presented information about an incentive it proposed to offer to a company, it would sometimes list the incentives the company is receiving from other governments. As an example, when the city offered incentives to NetApp in 2012, the city’s contribution was given as a maximum of $418,000. The agenda material mentioned — obliquely — that the State of Kansas was involved in the incentive package. Inquiry to the Kansas Department of Commerce revealed that the state had promoted incentives worth $35,160,017 to NetApp. Wichita’s incentive contribution is just 1.2 percent of what the state offered, which makes us wonder if the Wichita incentive was truly needed.
The importance of marginal thinking
When evaluating economic development incentives, we often fail to properly evaluate the marginal gains. Here’s an example of the importance of looking at marginal gains rather than the whole. In 2012, the City of Wichita developed a program called New HOME (New Home Ownership Made Easy). The crux of the program is to rebate Wichita city property taxes for five years to those who buy newly-built homes in certain neighborhoods under certain conditions.
The important question is how much new activity this program will induce. Often government takes credit for all economic activity that takes place. This ignores the economic activity that was going to take place naturally — in this case, new homes that are going to be built even without this subsidy program. According to data compiled by Wichita Area Builders Association and the WSU Center for Economic Development and Business Research — this is the data that was current at the time the Wichita city council made its decision to authorize the program — in 2011 462 new homes were started in the City of Wichita. The HOME program contemplated subsidizing 1,000 homes in a period of 22 months. That’s a rate of 545 homes per year — not much more than the present rate of 462 per year. But, the city has to give up collecting property tax on all these homes — even the ones that would be built anyway.
What we’re talking about is possibly inducing a small amount of additional activity over what would happen naturally and organically. But we have to subsidize a very large number of houses in order to achieve that. The lesson is that we need to evaluate the costs of this program based on the marginal activity it may induce, not all activity. For more, see Wichita new home tax rebate program: The analysis.
Does the Wichita Metro Chamber of Commerce support free markets, capitalism, and economic freedom, or something else?
Very often, local chambers of commerce support crony capitalism instead of pro-growth policies that allow free enterprise and genuine capitalism to flourish.
We saw this in Wichita this year, where the Wichita Metro Chamber of Commerce campaigned for a sales tax increase. The Chamber recommended that Wichitans vote in favor of a sales tax of one cent per dollar, with some of the proceeds to be dedicated for a jobs fund. (Other uses were to be for a new water supply, expanded bus transit, and accelerated neighborhood street repair.) Chamber leaders told the Wichita city council that if the jobs fund was not included in the package presented to voters, the Chamber would not support the sales tax.
Not long ago the Wichita Chamber was opposed to higher sales taxes. In March 2010, as chair of the Wichita Chamber, Sam Williams submitted a letter to the Wichita Eagle in which he wrote “Tax increases and government spending will not create employment or revive the state’s economic engine. Increasing the costs of goods and services will only lead to fewer purchases, more business closures, higher unemployment and less taxes being paid.”
In April of same year, he wrote again to the Eagle, advising Wichitans this: “Simply put, raising taxes hurts business, costs jobs and ultimately leads to fewer taxpayers and fewer taxes being paid to fund state and local government.”
Having espoused these anti-tax sentiments just four years ago, it’s curious that the Wichita Chamber would support and campaign for a sales tax for Wichita this year. This spills over to mayoral politics. As far as I saw, Sam Williams, — the Chamber’s chair in 2010 — did not take a public position on the sales tax this year. Except for this: Williams is chair of the Wichita Downtown Development Corporation, and that organization endorsed the sales tax.
Regarding mayoral politics: Did you know that Sam Williams is running for mayor? And that it appears he has the support of the Wichita Chamber?
I have a request. If you see Sam Williams, would you ask him about his position on raising sales taxes?
Your chamber of commerce
Most people probably think that local chambers of commerce — since their membership is mostly business firms — support pro-growth policies that embrace limited government and free markets. But that’s usually not the case. Here, in an excerpt from his article “Tax Chambers” economist Stephen Moore explains:
The Chamber of Commerce, long a supporter of limited government and low taxes, was part of the coalition backing the Reagan revolution in the 1980s. On the national level, the organization still follows a pro-growth agenda — but thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government.
In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper. Journalist Tim Carney agrees: All too often, he notes in his recent book, “Rip-Off,” “state and local chambers have become corrupted by the lure of big dollar corporate welfare schemes.”
In the states, chambers have come to believe their primary function is to secure tax financing for sports stadiums, convention centers, high-tech research institutes and transit boondoggles. Some local chambers have reportedly asked local utilities, school administrators and even politicians to join; others have opened membership to arts councils, museums, civic associations and other “tax eater” entities.
“I used to think that public employee unions like the NEA were the main enemy in the struggle for limited government, competition and private sector solutions,” says Mr. Caldera of the Independence Institute. “I was wrong. Our biggest adversary is the special interest business cartel that labels itself ‘the business community’ and its political machine run by chambers and other industry associations.”
From Stephen Moore in the article “Tax Chambers” published in The Wall Street Journal February 10, 2007. The full article can be found here.
In Wichita, the chair of the Wichita Metro Chamber of Commerce crafts a sweetheart deal for his company to the detriment of Wichita taxpayers.
In November 2013 the Wichita City Council granted an exemption from paying property and sales tax for High Touch Technologies, a company located in downtown Wichita. This item was of more than usual interest as the company’s CEO, Wayne Chambers, is now chair of the Wichita Metro Chamber of Commerce.
At the same time the city council voted to rent to High Touch up to 180 parking stalls at monthly rent of $35. These are located in the garage at 215 S. Market. The condition of the garage had deteriorated so much that it had been closed. In March 2014 the city council decided to rehabilitate the garage. According to city documents, the cost to rehabilitate the garage is $9,685,000, which creates 550 parking stalls. This is a cost per stall of $17,609.
A question is this: Who was the biggest beneficiary of this transaction: High Touch and its owners, or city taxpayers?
To evaluate real estate investments, a common metric is capitalization rate. The formula is
capitalization rate = annual net operating income / cost (or value)
For a parking stall in this garage as rented to High Touch, the capitalization rate is
($35 per stall per month * 12 months per year) / $17,609 cost = 2.4 percent
How do we place this number in context? Is this a good or bad deal for taxpayers? To answer this question, we need to find an appropriate capitalization rate. In major cities the capitalization rate for parking garages is lower than for other types of real estate, perhaps five percent. Local sources say the rate in Wichita for parking garages could be seven or eight percent, but there are no recent parking lot transactions to help gauge what the market wants for a capitalization rate. Taxpayers may remember when the city evaluated the Union Station project in October, part of which is a parking garage, the city used a capitalization rate of nine percent. That’s the capitalization rate the city felt the investor deserved to earn, and the city used that rate to justify taxpayer subsidy.
But on the 215 S. Market garage the city, on behalf of taxpayers, accepted a cap rate of just 2.4 percent.
What if the city wanted to earn a capitalization rate of nine percent for taxpayers? The annual rent for each parking stall would have to be $1,585, or $132 per month. At seven percent capitalization rate, the monthly rent would be $103.
But the city is renting the spaces for just $35, not $132 or $103.
It’s actually a better deal for High Touch — and a correspondingly worse deal for city taxpayers — than these numbers show. If High Touch was to build a parking garage itself, it would encounter expenses such as insurance, lighting, cleaning and sweeping, repairs and maintenance, and security. Not to mention taxes, which the city does not pay. But the city will pay these other expenses, except for insurance, as the city self-insures. That has an implicit cost that taxpayers bear.
All of these costs are contained in the $35 monthly rent the city will collect from High Touch. It’s a great deal for High Touch, and a bad deal for city taxpayers. It also establishes a template whereby private sector developers are unlikely to develop parking in downtown Wichita when there is a competitor that can undercut their rates, using taxpayer dollars to do so.
Taxpayers might remember that the biggest subsidy for High Touch — the property and sales tax breaks — started when the company CEO dropped hints that the company might add jobs elsewhere than Wichita. Chambers told the Wichita Business Journal that he considered moving the office to another city. All this happened while he was working his way up the leadership ladder to become chair of the Wichita Chamber.
Now that the proposed Wichita sales tax has failed, how should Wichita pay for a future water supply?
At the December 2 meeting of the Wichita city council, discussion by Council member Pete Meitzner (district 2, east Wichita) referred to the recent election in which Wichita voters rejected a proposed sales tax. (Video below, or click here to view at YouTube.) The major portion of the tax, $250 million collected over five years, would have been used to expand the ASR system as a way of providing for Wichita’s future water needs.
One of the arguments advanced by opponents of the sales tax such as myself is that water users should pay for future water supply. Advocates of the sales tax disagreed, arguing that Wichitans and visitors should pay higher sales taxes to fund a new water supply.
What does the arithmetic look like if we pay for a water supply though water bills? (Some use the term rates.) First, let’s set aside the questions of when the city needs an expanded water supply and how that water should be supplied.
Meitzner’s questioning of city public works director Alan King elicited how many water meters or accounts the water department has, which King said is almost 140,000. Meitzner then proceeded to ask if the cost of a new water supply — $250 million — was born equally by each of these customers, how much would that add to water bills? King said it would be in the range of “23, almost 24 dollars per bill, and at the high end something closer to 30 dollars per bill. That would be each month, you would have to pay that for 60 months.”
Meitzner then ran through computations that resulted in a cost of $1,500 per meter over five years to pay for the cost of a new water supply. He then compared that to sales tax opponents who said that the cost of the additional sales tax per family would be $160 per year. Meitzner said that would be an additional cost of $800 over five years to pay for everything the proposed sales tax was dedicated to, not just a new water supply.
The line of reasoning followed by Meitzner is superficially appealing but economically unsound. It is true that water bills would have to rise by quite a bit in order to raise $250 million over five years. But it seems unlikely that the city would decide to spread that cost equally among its water customers. Would the city ask its largest industrial customers to contribute the same amount each month as small households that do no outside irrigation? I don’t think that most people would think this is reasonable. But Meitzner’s arithmetic implies that the city would, or could, do exactly this.
There are many ways the city could apportion the cost of a new water supply among water users. First, the city could simply raise the price of a gallon of water. That would let water users participate in the funding of a new water supply in proportion to the amount of water they use.
Second, the city could add a fixed amount to each water bill, that money reserved for a future water supply. The city already has a fixed cost for water service. It’s referred to in the rate ordinance as the “minimum monthly” charge. It varies from $11.95 per month for the smallest hookups to $478.78 per month for the largest wholesale users. This amount could be increased by equal portion — say ten percent — for everyone. Or, if the city wants to reduce the burden on small households, it could leave the rate for small hookups as it is, and raise it for larger hookups.
Third, the city could decide to raise the price of a gallon of water by different amounts for different classes of water users. Wichita, like many cities, use a tiered structure of rates that separates summer irrigation water usage from household usage inside the home. How does Wichita’s tiered structure of rates compare to other cities? A recent Black & Veatch survey found for that the 50 cities in the survey, considering only the water portion of bills, the average cost for using 3,750 gallons per month is $19. For using 15,000 gallons, the cost is $65. That’s a ratio of 3.4 to 1. For Wichita, the survey reported costs of $18 and $36, for a ratio of 2.0 to 1.
These are two important numbers: 3.4 and 2.0. They mean that while the price per gallon of Wichita water becomes marginally more expensive as more water is used, the slope is as steep as the average. It means that Wichita households that use low amounts of water pay about average rates, but those Wichita households using a lot of water pay rates much less than average. This is something the city could easily adjust. It would also have the benefit of encouraging conservation, which is something the city says is important for our future.
We need to be aware of the cost of water
It’s important to have water users pay for a new water supply. The benefit is that water users will become acutely aware of the costs of a new water supply. That awareness is difficult to achieve. Many citizens are surprised to learn that the city has spent $247 million over the past decade on a water project, the ASR program. Nearly all that was paid by using long-term debt, the same type of debt that the city urged citizens to avoid during the sales tax campaign.
Paying for a new water supply through water bills would let commercial and industrial users participate in paying the cost of the project. These water users usually don’t pay a lot of sales tax. A restaurant, for example, does not pay sales tax on the food ingredients it purchases. An aircraft manufacturer does not pay sales tax on the raw materials and component parts it buys. But these companies have a water bill. Yet, the city recommended that low income households pay more sales tax on their groceries. The city said this is the best way to pay for a new water supply to protect our lawns and golf courses during a drought.
In a Wichita Eagle article about the Intrust Bank Arena in downtown Wichita, we see Wichita public relations consultant Vera Bothner complain that Wichita is being unfairly compared to other cities in our region, in particular Oklahoma City, Tulsa, and Kansas City. Wichita is smaller than these cities, she says, and we should not hold Wichita to a standard that it can’t meet.
But in public life, we find Wichita frequently compared to these cities. These three cities are part of the four metropolitan areas that Visioneering Wichita choose as peers. (The other is Omaha.)
During the recent sales tax campaign, pro-tax advocates often mentioned Oklahoma City and Tulsa as cities that Wichita should emulate.
So it may be confusing for Wichita voters to determine when a comparison of Wichita to Oklahoma City and Tulsa is valid, and when it is not.
There is a trend, however. For the Wichita business establishment, represented by the Wichita Metro Chamber of Commerce (Bothner is a member of its executive committee), the trend is for more taxes and more government spending. Whenever a comparison can be made that results in the conclusion that there’s not enough taxation and government spending in Wichita, it’s likely the Wichita Metro Chamber of Commerce will do that.
(By the way, if people are worried about running government like a business, a good place to start this discipline would be Intrust Bank Arena, with treating its finances like an actual business. Proper attention given to the depreciation expense of Intrust Bank Arena in downtown Wichita would recognize and account for the sacrifices of the people of Sedgwick County and its visitors to pay for the arena. But that doesn’t happen. See Intrust Bank Arena: Not accounted for like a business.)
Here’s an excerpt from After 5 years, Intrust Bank Arena still battles image problem.
Comparing Intrust Bank Arena to Tulsa’s BOK center is a mistake, although a common one, said Vera Bothner, whom SMG hired as a local consultant. Comparing it to Kansas City’s Sprint Center or Oklahoma City’s Chesapeake Energy Arena are even bigger mistakes. But many fans do that, she found.
Tulsa’s population base, for one, is Wichita’s and a half. Wichita has about 637,000 people in its metro area. Tulsa has 960,000. Tulsa’s arena is bigger, too, with 4,000 more seats.
Oklahoma City and Kansas City are even further out of Wichita’s league. Kansas City’s population is 2.05 million, and its Sprint Center seats 19,500. Oklahoma City has 1.32 million people, and its arena holds 18,200.
In reality, Bothner said, Wichita is more comparable to Little Rock, Ark., which has a population of 725,000 and an 18,000-seat arena; Des Moines, with 600,000 people and a 17,000-seat arena; and Bossier City, La., and its 14,000-seat CenturyLink Center.
“The economics of this particular marketplace have just been hard for people to understand, I think, because geographically we compare ourselves to these other cities, and we do that a lot,” Bothner said. “But just because arenas are in our geographic region does not mean that the demographics and the size of the city are similar enough to make a good comparison.”
As Wichita enters campaign season for mayor and city council, will any candidates call for implementing a reform that we desperately need in Wichita? Following, from 2012, explains.
In the wake of scandals some states and cities have passed “pay-to-play” laws. These laws may prohibit political campaign contributions by those who seek government contracts, prohibit officeholders from voting on laws that will benefit their campaign donors, or the laws may impose special disclosure requirements.
Many people make campaign contributions to candidates whose ideals and goals they share. This is an important part of our political process. But when reading campaign finance reports for members of the Wichita City Council, one sees the same names appearing over and over, often making the maximum allowed contribution to candidates.
And when one looks at the candidates these people contribute to, you notice that often there’s no common thread linking the political goals and ideals of the candidates. Some people contribute equally to liberal and conservative council members. But then, when these people appear in the news after having received money from the Wichita City Council, it snaps into place: These campaign donors are not donating to those whose political ideals they agree with. Instead, they’re donating so they can line their own pockets. These donors are opportunists.
As another example, for the 2008 campaign for a bond issue for USD 259 (Wichita public school district), my analysis found that 72 percent of the contributions, both in-kind and cash, was given by contractors, architects, engineering firms, and others who directly stand to benefit from school construction. Do these companies have an especially keen interest in the education of children? I don’t think so. They are interested in themselves.
Some states and cities have taken steps to reduce this harmful practice. New Jersey is notable for its Local Unit Pay-To-Play Law. The law affects many local units of government and the awarding of contracts having a value of over $17,500, requiring that these contracts be awarded by a “fair and open process,” which basically means a contract process open to bidding.
Cities, too, are passing pay-to-pay laws. Notably, a recently-passed law in Dallas was in response to special treatment for real estate developers — the very issue Wichita is facing now as it prepares to pour millions into the pockets of a small group of favored — and highly subsidized — downtown developers who are generous with campaign contributions to almost all council members. Not that this is new to Wichita, as the city has often done this in the past.
Smaller cities, too, have these laws. A charter provision of the city of Santa Ana, in Orange County, California, states: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”
But Kansas has no such law. Certainly Wichita does not, where pay-to-play is seen by many citizens as a way of life.
In Kansas, campaign finance reports are filed by candidates and available to citizens. But many politicians don’t want campaign contributions discussed, at least in public. Recently Wichita Council Member Michael O’Donnell expressed concern over the potential award of a $6 million construction contract without an open bidding process. The contractor the city wanted to give the contract to was Key Construction, a firm that actively makes political contributions to city council members, both conservative and liberal.
For expressing his concern, O’Donnell was roundly criticized by many council members, and especially by Mayor Carl Brewer.
Here’s what’s interesting: Brewer and city council members say the campaign contributions don’t affect their votes. Those who regularly make contributions say they don’t do it to influence the council. Therefore, it seems that there should be no opposition to a pay-to-play law in Wichita — or the entire state — like the one in Santa Ana.
But until we get such a law, I can understand how Wichita city council members don’t want to discuss their campaign contributions from those they’re about to vote to give money to. It’s not about supporting political ideologies — liberal, moderate, or conservative. It’s about opportunists seeking money from government.
The practice stinks. It causes citizens to be cynical of their government and withdraw from participation in civic affairs. It causes government to grow at the expense of taxpayers. Pay-to-play laws can help reverse these trends.
You may download a printable copy of this article at Kansas Needs Pay-to-Play Laws.
The City of Wichita’s legislative agenda regarding the Affordable Airfares subsidy program seems to be based on data not supported by facts.
As the City of Wichita prepares its legislative agenda for the Kansas Legislature, the first issue gets off to a rocky start with figures that are not aligned with facts. Probably the largest whopper is the claim of how much has been saved in airfares. The Wichita document states this: “Since 2002, Affordable Airfares has provided $1.446 billion in savings for Wichita Mid-Continent air travelers.”
That is a lot of money. It is certainly exaggerated. We don’t really know how much the subsidy program has saved, as we can not know what would have happened had there been no subsidy program. So we estimate, and here two estimates.
A study from Dr. Art Hall contained this: “Combining the estimated aggregate savings for AirTran and Frontier sums to an annual average range of $30.75 to $39.5 million. (An Evaluation of the Kansas Affordable Airfares Program, Arthur P. Hall, Ph.D., February 2013)
Minutes of a July 2011 REAP board meeting hold “This program also saved air travelers out of MidContinent Airport more than $33.2 million in reduced fares in 2010, compared to 2000.”
So if we use, say, $35 million as the annual savings, then for the 12 years from 2002 to 2014 the savings sum to $420 million. The city claims $1,446 million, or 3.4 times as much. Wichitans might want to ask city hall why there is such a large difference.
The city’s legislative agenda also mentions a presentation given by William S. Swelbar, an aviation industry analyst, reporting “The Wichita airport performance is acknowledged for its unique performance in growth and capacity (Bill Swelbar presentation at WSU Economic Conference).” There are several curious aspects of this presentation.
The slide that shows growth in traffic at the Wichita airport needs to be interpreted with caution. First, note that the scale of the vertical axis does not start with zero. This is something that needs to be recognized. Here’s why: The bars for departures appear to be rapidly rising. The bar for 2013 looks about twice as tall as the bar for 2102. This leads to the impression that whatever it is that these bars represent, it has doubled from 2012 to 2013. That’s because bars on a chart traditionally represent a quantity of something, starting from zero.
When we examine the entire vertical axis of the chart, we see that it does not start with zero. Instead, it starts at the value 12,050, and the entire axis represents a range of 250 passengers per year. This means that the increase in departures from 2012 to 2013, which looks like an impressive jump in Swelbar’s chart — a doubling in value — is an increase from 12,120 to 12,195. This represents a growth of departures of 75 per year, which is 0.62 percent. Or, about 6 flights per month. This is better than a decline, but not by much. (I’m reading the chart and interpreting the height of the bars against the scale, so these numbers could be off a bit.)
It is not deceptive to start a bar chart from a point other than zero, as long as readers are aware of that and interpret the numbers cautiously and appropriately. But that wasn’t made clear in this presentation. These numbers need to be placed in meaningful context. Otherwise, city council members and bureaucrats might jump on this chart and use it as evidence of dramatic changes happening at the Wichita airport when in reality the change is quite mild. This is what has happened.
What about the increase in departures from 2013 to 2014? The presentation by Swelbar was given in October 2014 and would have been based on data available only through June or July. But somehow, Swelbar told the audience how many departures the Wichita Airport would experience in all 2014. I can understand presenting an estimate for 2014, but the number is not presented as such.
The data for the years that are complete also appear to be questionable. For departures, Swelbar shows departures rising from 12,120 for 2012 to 12,195 for 2013 (again, estimating from the heights of bars on the chart). The Bureau of Transportation Statistics shows departures from Wichita in 2012 as 12,037, then declining to 11,984 for 2013. (Click here to view these statistics.) The statistics from the Wichita airport don’t directly report the number of scheduled departures. For what it’s worth, the airport reports passenger count of 1,509,206 in 2012, which fell to 1,508,872 in 2013.
These are problems found on the first page of the city’s presentation. The agenda was presented to the council during a workshop on November 25. The council will vote on adoption of the agenda on December 9, having postponed the vote from December 2.
The Wichita city council has been busy with economic development items, and more are upcoming.
At the November 25 meeting of the Wichita City Council, on the consent agenda, the council passed these items.
Approved a sublease in a warehouse. This action was necessary as the incentivized warehouse pays no property taxes due to a subsidy program. Given tax costs and industrial building rents, this policy gives these incentivized buildings a cost advantage of about 20 to 25 percent over competitors. That’s very high, and makes it difficult for existing buildings to compete. This lease is for 40,500 square feet for annual rent of $196,425.00, which is $4.85 per square foot. Competing warehouse space might be able to charge rent of $4.25 plus property tax of about $1.00, for a total rent of $5.25 per square foot to the tenant. In the case of the subsidized building, the landlord collects $4.85 instead of $4.25, and the tenant pays $4.85 instead of $5.25. Everyone’s happy. Everyone, that is, except for existing industrial landlords in Wichita — especially those with available space to rent — who must be wondering why they attempt to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage. Then, other commercial tenants must be wondering why they don’t get discounted rent. Taxpayers must be wondering why they have to make up the difference in taxes that the subsidized tenants aren’t paying. (On second thought, these parties may not be wondering about this, as we don’t have a general circulation newspaper or a business newspaper that cares to explain these things.) See Wichita speculative industrial buildings.
Set January 6 as the date for a public hearing on a TIF district project plan. This is the plan for Union Station in downtown Wichita. The public hearing for the formation of its tax increment financing district has already been held, and it passed. The project plan will consider and authorize the actual project and spending of taxpayer funds to reimburse the developer for various items. Unlike the formation of the TIF district, the county and school district have no ability to object to the project plan.
Set December 16 as the date for the public hearing on the formation of a community improvement district. This district is for the benefit of the River Vista project, the proposed apartments on the west bank of the Arkansas River between Douglas and First streets. CIDs redirect sales tax revenue from general government to the developers of the project. Say, does anyone remember Charter Ordinance No. 144, which says this land “shall be hereafter restricted to and maintained as open space”? See In Wichita, West Bank apartments seem to violate ordinance.
Also on that day, during its workshop, the council heard items for the city’s legislative agenda. I have a several articles covering these topics as they relate to the legislative agenda: Airfares, passenger rail, cultural arts districts, and economic development.
On its December 2 agenda, the council has these items:
Property tax and sales tax exemptions for Bombardier Learjet. The council may grant property tax discounts worth as much as $268,548 per year for up to ten years, according to city documents. This will be split among taxing jurisdictions as follows: City $72,389, State $3,340, County $65,415, and USD 259 $127,404. The purchased items may also receive an exemption from sales tax, but city documents give no amount. Bombardier boasts of “Investing in the communities where we do business to ensure we have strong contexts for our operations” and “We support our home community through donations, sponsorships and our employee volunteering program.” Evidently this commitment to investment and support does not extend to shouldering the same tax burden that everyone else does.
Property tax exemptions for Cessna Aircraft Company. The council may grant property tax discounts worth as much as $302,311 per year for up to ten years, according to city documents. This will be split among taxing jurisdictions as follows: City $81,491, County $73,639, State $3,760, and USD 259 $143,421. Generally, items purchased with proceeds of the IRB program also receive sales tax exemption, but city documents do not mention this. Cessna speaks of its commitment to the communities where it operates, but evidently this commitment does not extend to shouldering the same tax burden that everyone else does.
Property tax exemptions for High Touch. This is an extension of tax breaks first granted last year. See In Wichita, the case for business welfare. Did you know the CEO of this company is also chair of the Wichita Metro Chamber of Commerce? And that while campaigning for higher sales taxes in Wichita, including higher taxes on groceries for low-income households, he sought and received a sales tax exemption for his company?
Forgivable loan to Apex Engineering International. The Wichita Eagle reported that this company “has been growing briskly and adding employees.” Still, the company seeks incentives, in this case a forgivable loan from the city of $90,000. It will ask Sedgwick County for the same amount. These loans are grants of cash that do not need to be repaid as long as goals are met. Three years ago Apex received $1,272,000 in tax credits and grants under programs offered by the State of Kansas. It is not known at this time if Apex is receiving additional subsidy from the state. According to a company news release, “AEI was nominated for the Wichita Metro Chamber of Commerce 2012 Small Business Awards. This prestigious award recognizes two companies each year who are selected based on specific criteria including: entrepreneurship, employee relations, diversity, community contribution and involvement, and leadership and performance.” Maybe we can justify this grant as repayment for Apex’s community contribution. This forgivable loan may receive resistance from some council members. Current council member and mayoral candidate Jeff Longwell (district 5, west and northwest Wichita) was recently quoted in the Wichita Eagle as wanting a “moratorium on forgivable loans right now until we can reassess the way that we do economic development.” While campaigning for his current office, Council member Pete Meitzner (district 2, east Wichita) told an audience “I am not for forgivable loans.” He noted the contradiction inherent in the terms “forgivable” and “loan,” calling them “conflicting terms.” Meitzner has said he will run for his current office again.
Set January 6 as the date for the public hearing regarding the project plan for the Mosely Avenue Project TIF district in Old Town. This TIF district is a project of David Burk and Steve Barrett. Burk has received millions of taxpayer dollars in subsidy. But he’s not finished.
Consider whether to raise water bills by about 5 percent.
Consider a new lease agreement with Museum of World Treasures, Inc. which will, among other things, reduce the museum’s rent paid to the city from $60,000 per year to $1.
Consider passing the legislative agenda. See above for more on this topic.
The City of Wichita wishes to preserve the many economic development incentives it has at its disposal.
The proposed legislative agenda for the City of Wichita holds this regarding economic development incentives:
ISSUE: The State of Kansas provides economic development incentives through a variety of programs.
RECOMMEND: The Wichita City Council supports the continuation of state economic incentive programs that assist local governments in their efforts to improve their local economies.
That’s all the agenda holds. In the presentation for the previous year, the request was more complete, naming specific programs. It’s useful to revisit that list, as Wichita leaders often complain that Wichita doesn’t have enough “tools in the toolbox” to compete effectively in economic development.
In a way, I don’t blame the city for omitting the list this year. Part of the campaign for the proposed sales tax was that Wichita doesn’t have enough incentives to compete for jobs. In making that argument, city leaders use a narrow definition of incentive that doesn’t count the programs listed below. Given the poor results of the city’s economic development machinery, you can see why city leaders minimize the number of incentive programs and the amounts of money that are available.
Here are the programs listed in the previous legislative agenda that the city wants the legislature to protect. Some of these are so valuable that Kansas business leaders told the governor that they value these incentives more than they would value elimination of the state corporate income tax.
- GWEDC/GO WICHITA: Support existing statutory records exemptions
- Industrial Revenue Bond tax abatements (IRBX)
- Economic Development Exemptions (EDX)
- Tax Increment Financing (TIF)
- Sales Tax Revenue (STAR) Bonds
- Community Improvement Districts (CID)
- Neighborhood Revitalization Area (NRA) tax rebates
- Special Assessment financing for neighborhood infrastructure projects, facade improvements and abatement of asbestos and lead-based paint.
- State Historic Preservation Tax Credits (HPTC)
- State administration of federal Low Income Housing Tax Credits (LIHTC)
- High Performance Incentive Program (HPIP) tax credits
- Investments in Major Projects and Comprehensive Training (IMPACT) grants
- Promoting Employment Across Kansas (PEAK) program
- Economic Revitalization and Reinvestment Act bonding for major aviation and wind energy projects
- Kansas Industrial Training (KIT) and Kansas Industrial Retraining (KIR) grants
- Network Kansas tax credit funding
- State support for Innovation Commercialization Centers in Commerce Department budget
Wichita government spending on economic development leads to imagined problems that require government intervention and more taxpayer contribution to resolve. The cycle of organic rebirth of cities is then replaced with bureaucratic management.
As the City of Wichita prepares its legislative agenda for 2015, an issue arises for the first year. It seems that the success of government spending on development has created rising property values, which creates higher tax bills, and that is a burden for some. Here’s the issue the city has identified: “Cultural arts enterprises in certain areas are threatened by rising property values and the resulting tax burden.”
Here’s the solution the city proposes: “The Wichita City Council supports state legislation that would allow local governments to use innovative measures to protect cultural arts enterprises from circumstantial increases in property taxes. The intent is to nurture and preserve arts activity throughout the City of Wichita and the State of Kansas.”
What are the “innovative measures” the city wants to use? Nothing special; just allowing a special group of people to shirk paying the same taxes that everyone else has to pay. The city wants to be able to use tax abatements for up to ten years. The percentage of taxes that could be forgiven could be as high as 80 percent.
So there’s really nothing innovative to see here. The city merely wants to broaden the application of tax forgiveness. Which means the tax base shrinks, and the people who still find themselves unlucky enough to still be part of the tax base face increasing demands for their tax payments.
The city manager said that artists from Commerce Street came to the city looking for a solution to their problem. Which is about the same problem that everyone else has: high taxes.
Here’s the nub of the problem, as explained by the city manager: “The more successful that we are with the redevelopment, the higher the value of the properties, and therefore harder for them who are on thin margins to begin with to stay in the districts, so they lose their charm of being the artistic or art districts.”
The proposed solution, which will require a change to state law, is that a government bureaucrat will decide the boundaries of one or more cultural arts districts. The bureaucrat will also decide which types of business firms qualify for discounts on their taxes. Besides Commerce Street, the manager identified Delano, Old Town, and the Douglas Design District as possible districts where artists might receive 80 percent discounts on their property taxes.
After this, other taxpayers have to make up the lost tax revenue from the artists. That is, unless the city decides to reduce spending by the amount of the tax discounts. I’ve proposed that to the city in other similar circumstances, and the idea was rejected. I believe council members thought I was delusional.
There are many people and business firms that operate on the same “thin margins” that the city manager wants to help artists escape. We see them come to city hall seeking special treatment. As a result, the city plans and manages an increasing share of the economy, and economic freedom, entrepreneurship, and the potential for a truly dynamic economy decline.
Who will stake out the next frontier?
There are many problems with the idea the city is proposing.
One is that the city is asking poor people to pay their full share of property taxes while granting artists a discount. This is a serious problem of equity, which is that people in similar circumstances should be treated the same. Just because someone chooses art as a business or vocation doesn’t mean they should be treated specially with respect to the taxes they pay.
Another problem is that the process of establishing arts districts will interrupt the dynamism of the way cities develop. Arts districts develop because artists want (or need) places with cheap rent. Unless they can persuade city hall to grant property tax discounts, this generally means artists rent space in “bad” parts of town, that is, parts of town that are run down, blighted, and may have high crime rates. Thus, cheap rent.
If things go well, that is, the artists are successful and a community develops, things get fixed up. Rents rise. Taxes rise. The artists can’t afford the higher rent and taxes and have to move on. Which means the cycle repeats. The artists on the cutting edge find other places to move to, and the cycle repeats. Other parts of the city are reborn — organically — through the benefits of markets, not government bureaucracy. This is good.
Except: The City of Wichita is proposing to end the cycle by granting discounts on taxes to artists so they may remain where they are.
We replace dynamism with stagnation by bureaucracy. The city says this is innovative.