Downtown Wichita revitalization

Articles about the redevelopment of downtown Wichita and its impact on the economic freedom of Wichitans.

No-bid contracts a problem in Wichita

by Bob Weeks on February 8, 2012

Wichita Eagle reporting by Bill Wilson uncovers a problem with no-bid contracts for construction projects in Wichita. Fortunately, the city manager recognizes the problem and will propose a partial solution.

Wilson reports on two past Key Construction garage projects that were completed with costs well over their budgets. Key Construction was scheduled to be the no-bid contractor on the upcoming Douglas Place garage, being built largely to provide parking to the Wichita Ambassador Hotel. The no-bid cost of the garage was to be $6 million, according to a letter of intent passed by the Wichita City Council.

But when competitively bid, the cost will be almost $1.3 million less. This is a direct savings to taxpayers of the same amount. All members of the council except for Michael O’Donnell (district 4, south and southwest Wichita) voted for the no-bid contract to Key Construction, although Wichita Mayor Carl Brewer was absent. It is certain that he would have voted with the majority, however.

Because of the perverse economic incentives of tax increment financing (TIF) — one of the two financing sources for the garage — it was actually to the benefit of hotel developers and Key Construction to spend as much as possible on the parking garage. See Wichita TIF: Taxpayer-funded benefits to political players for more on this topic.

By the way, Key Construction is part of the Ambassador Hotel development team. Further, the owners and principle executives of Key Construction are generous campaign financiers for both liberal and conservative members of the Wichita City Council. See Wichita City Council campaign contributions and Douglas Place for details on Key Construction political contributions.

This episode illustrates these things: a Wichita City Council almost totally captured by special interests and opportunists, crony capitalism on steroids, and another example of why Wichita and Kansas need pay-to-play laws.

Wichita city manager proposes eliminating no-bid construction projects

By Bill Wilson

The days of awarding construction projects without taking competitive bids might be numbered at City Hall if City Manager Robert Layton has his way, especially with public projects such as parking garages that are part of private commercial development.

Layton said last week that he intends to ask the City Council for a policy change against those no-bid contracts. The contracts became an issue after council members Michael O’Donnell and Pete Meitzner forced the city to take bids on the city-financed 300-stall parking garage adjacent to the privately financed Ambassador Hotel Wichita at Douglas and Broadway. Bids for the garage came in almost $1.3 million under some project estimates, the first publicly financed downtown parking garage in almost 20 years to come in under budget, according to figures from the city’s office of urban development.

Continue reading at The Wichita Eagle.

Tagged as: Capitalism, Downtown Wichita revitalization, Tax increment financing, TIF districts, Wichita city council, Wichita city government

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Wichita turns taxation over to private interests

by Bob Weeks on December 4, 2011

In a free society with a limited government, taxation should be restricted to being a way for government to raise funds to pay for services that all people benefit from. But in the city of Wichita, taxation for private gain is overtaking our city.

The Ambassador Hotel, part of a project known as Douglas Place, makes use of several of these private tax policy strategies. By private tax policy, I mean that the proceeds of a tax are used for the exclusive benefit of one person (or business firm), instead of used for the benefit of all. In one example related to this hotel, the Wichita City Council is allowing private parties to determine the city’s tax policy at their discretion, not the city’s.

The tax in question is Wichita’s hotel guest tax. According to a description of the Tourism and Convention Fund in the city’s budget document, the goal of the guest tax is to “support tourism and convention, infrastructure, and promotion of the City.” Its priorities are to be “Fund priorities are: 1) debt service for tourism and convention facilities, 2) operational deficit subsidies and 3) care and maintenance of Century II.”

But in the case of the Ambassador Hotel project, the city passed a charter ordinance that would route 75 percent of this tax directly back to the hotel owners for their own use. That’s not the proclaimed purpose of the guest tax.

Instead, this is public taxation for private enrichment.

Those who benefit from things like this and tax increment financing (TIF) districts say they aren’t really benefiting, as they are, in fact, paying taxes.

But when taxes you must pay are routed back to you for your own exclusive use, what else can you call it except capture of a public function for your own personal use?

Failure of Wichita city leadership

If you need further evidence that Wichita is turning over taxation to private hands, consider this: The charter ordinance is subject to a protest petition. In the normal case, if sufficient signatures are gathered, the city council would have to either a) overturn the ordinance, or b) hold an election to let voters decide whether the ordinance takes effect. An effort that I have been involved with expects to turn in enough signatures this week to force this decision.

Now, if this tax policy regarding the Ambassador Hotel is truly in the public interest, we would expect that the city council would decide whether to hold such an election and bear its costs itself. But that’s not the case. In the agreement between the city and the Douglas Place developers, we see this: “If Developer requests a special election solely for the purpose of passing the charter ordinance in the event a sufficient protest petition is submitted, Developer shall reimburse the City for the actual out of pocket costs and expenses of conducting such election.”

In other words, the city is turning over to private interests the decision as to whether to have such an election, and also the responsibility for paying for it. This is a failure of Wichita city leadership to do the things that government, not private interests, should do.

Private taxation funds political entrepreneurship

In Wichita, especially in downtown, we see the rise of private tax policy, that is, the taxing power of government being used for private purposes. The above example is just one example. This private tax policy is pushed by Wichita’s political entrepreneurs. These are the people who would rather compete in the realm of politics rather than in the market.

Examples of Wichita’s political entrepreneurs include the developers the Ambassador Hotel: David Burk of Marketplace Properties, and the principals of Key Construction.

Competing in the political arena is easier than competing in the market. To win in the political arena, you only have to convince a majority of the legislative body that controls your situation. Once you’ve convinced them the power of government takes over, and the people at large are forced to transfer money to the political entrepreneurs. In other words, they must engage in transactions they would not elect to perform, if left to their own free will.

In the free marketplace, however, entrepreneurs have to compete by offering products or services that people are willing to buy, free of coercion. That’s hard to do. But it’s the only way to gauge whether people really want what the entrepreneurs are selling. It’s also the way that wealth and prosperity are created. Government spending on business does not have this effect.

One of the ways that political entrepreneurs compete is by making campaign contributions, and the developers of Douglas Place have mastered this technique. Key Construction principles contributed $13,500 to Mayor Carl Brewer and four city council members during their most recent campaigns. Council Member Jeff Longwell alone received $4,000 of that sum, and he also accepted another $2,000 from managing member David Burk and his wife.

All told, Burk and his wife contributed at least $7,500 to city council candidates who will be voting whether to give Burk money. Burk and others routinely make the maximum contribution to all — or nearly all — candidates, even those with widely varying political stances. How can someone explain Burk’s (and his wife’s) contributions to liberals like Miller and Williams, and also to conservatives like Longwell, Meitzner, and former council member Sue Schlapp?

The answer is: Burk will be asking these people for money.

Wichitans need to rise against these political entrepreneurs and their usurpation of a public function — taxation — for their own benefit. The politicians and bureaucrats who enable this should realize they should be serving the public interest, not the narrow and private enrichment of the few at the cost of many.

Tagged as: Carl Brewer, Downtown Wichita revitalization, Government spending, Jeff Longwell, Tax increment financing, Taxation, Wichita city council, Wichita city government

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Wichita petition drive nears end

by Bob Weeks on December 1, 2011

It’s been a lot of work. Wichita city leaders ought to take notice that citizens are so opposed to their actions that they will venture out in winter to gather signatures in opposition.

The issue is the Ambassador Hotel, part of the Douglas Place project, in downtown Wichita. This project received a multi-layer cake of subsidies from the City of Wichita, State of Kansas, and even the U.S. federal government. One of these layers is subject to a protest petition that will force an election so that citizens may decide the matter. That’s what is coming to an end.

Petition organizers and volunteers have collected many signatures, but more are needed. This weekend is the final push, as signatures are due Tuesday December 6th. Following is an invitation to a party this Sunday where circulators can turn in signatures they have gathered, and where citizens may sign.

Thank you for adding your name and support to the hotel guest tax petition! Thanks to your efforts, it is likely Wichita voters will get to decide if one hotel should get a better tax break than the rest.

We’d like to show our appreciation by making our last petition collection effort a thank you party.

PLEASE JOIN US

Sunday, December 4, 2011
12:30 pm to 2:30 pm
at the Corporate Hills Marriott
9100 Corporate Hills Drive
(West of Webb Road just north of Kellogg. Click here for a map.)

Cake, coffee, and punch will be served. Free notaries will be on hand to receive your final petitions.

Bring friends and family who want to sign.

If you can’t attend but have a petition you would like a free notary to pick up, call John Todd at 316-312-7335.

PLEASE RSVP
infoks@afphq.org or 316-681-4415

QUESTIONS
Call Susan 316-681-4415

Tagged as: Downtown Wichita revitalization, Economic development, Subsidy, Wichita city council, Wichita city government

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Wichita economic development: And then what will happen?

by Bob Weeks on October 14, 2011

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.

Thomas Sowell explains the problem in a passage from the first chapter of Applied economics: thinking beyond stage one:

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 no 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 TIFs 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.

Tagged as: Downtown Wichita revitalization, Economic development, Economics, Politics, Tax increment financing, TIF districts, Wichita city council, Wichita city government

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The Wichita Eagle on naysayers: a disservice to Wichita

by Bob Weeks on October 10, 2011

Yesterday’s op-ed by Rhonda Holman in The Wichita Eagle reveals a crucial need for a newspaper with at least one conservative voice on its editorial board (Say ‘no’ to naysayers, October 9, 2011). Here are a few ways in which Holman and her newspaper’s editorial section are wrong about downtown Wichita development and a few other issues, and how the op-ed is a disservice to the people of Wichita:

The real world, according to Holman

While Holman cites the “real world” as the need to pour massive subsidy into downtown Wichita, I might ask this question: Why is downtown Wichita such an unattractive investment that lavish subsidy must be heaped upon those who invest there?

Actually, the broader question needs to be asked, as the city often subsidizes development all over town. An example is the new Cabela’s store, an example of “greenfield” development that supposedly sucks away all the money from downtown, and which the elitists despise. In that case the city lent its taxing authority to Cabela’s to be used for its own purposes. A more direct example was when the city granted, through a forgivable loan, $48,000 to The Golf Warehouse, located in a suburban office park.

So what is it about Wichita? Won’t anyone invest in Wichita without subsidy?

It turns out, fortunately, that many do.

In the “real world,” there’s a lot of development going on. It just isn’t always taking place where Holman and other elites think it should be taking place.

Interestingly, when the elites advocate for public funding of their goals, their own actions often belie their true preferences. For example, a lot of development in Wichita is taking place near Holman’s suburban home. Many other supporters of subsidized downtown development don’t live anywhere near downtown — or even in Wichita, in at least two examples.

Why this building?

There’s much more in Holman’s article that deserves discussion. For example, Holman writes: “The Union National Bank building is a prime example: If it could be developed without the use of public tools, it wouldn’t still be empty after 12 years.” Underlying this statement is the assumption that this property should be developed. I don’t know where she and the supporters of subsidized downtown development get these ideas. What is it about this property that gives it priority over other properties in the city or downtown?

If Holman makes the case that this small piece of land deserves massive public spending to support its development, can’t the same argument be made for every other vacant building or empty plot of land in downtown Wichita? We can anticipate that it will be.

Scrutiny, by cheerleaders only

Holman praises the scrutiny that the project has undergone, writing that the project has been “vetted by a public-private evaluation team.” By my reckoning, the committee that performs this function doesn’t have a single member who is skeptical of subsidies for downtown development. Can’t these people tolerate even one person who might voice dissent?

Further, that committee decided to approve the project despite the involvement of David Burk of Marketplace Properties. Holman’s own newspaper reported this last year: “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. … 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.”

The development agreement for the current project contains restrictions on the type of behavior that Burk has exhibited in the past. Call it the “Burk clause.”

Election as referendum?

Holman claims that the recent spring city elections were a referendum on downtown, and that subsidized downtown development won. (Here again Holman doesn’t make a distinction between “development” and “subsidized development.”)

But elections are a decidedly poor way to make these decisions. For one thing, policy regarding subsidized downtown development is just one issue that candidates ran on. Voters have to vote for the entire package. They can’t pick and choose among issues, and it’s a reason why we need to leave more economic activity in the realm of markets — where people can pick and choose what they want — rather than turning it over to politics.

Then, there’s the low turnout for these elections. In the past, Holman described the turnout for the spring primary as “depressingly low.” But now — since the results largely fit her ideology — she describes the election is a “referendum.”

Then, there’s this: A recent Rasmussen poll carried the headline: “Just 6% Think Most Politicians Keep Their Campaign Promises.” Elaborating, the pollster explained: “Voters remain overwhelmingly convinced that most politicians won’t keep their campaign promises, but they’re a little less convinced that their elected officials deliberately lie.”

As shown in my reporting of one of the first times two new city council members faced a test, they didn’t fare well at all (Wichita forgivable loan action raises and illustrates issues):

Politically, Wichitans learned today the value of promises or statements made by most candidates while campaigning. Most candidates’ promises along with $3.75 will get you a small cappuccino at Starbucks — if you don’t ask for whipped cream.

Particularly interesting is the inability of politicians to admit they were wrong, or that they made a mistake, or that they were simply uninformed or misinformed when they made a campaign promise or statement. … City council members Clendenin and Meitzner could not bring themselves to admit that their votes today were at odds with their statements made while campaigning. This lack of honesty is one of the reasons that citizens tune out politics, why they have such a cynical attitude towards politicians, and perhaps why voter turnout in city elections is so low.

As one young Wichitan said on her Facebook page after sharing video of the three new council members today, obviously referring to city council district 2′s Pete Meitzner: “How to use your mouth: 1. Campaign under the guise that you are a fiscal conservative. 2. Insert foot.

Finally, there are the out-sized campaign contributions made by those who ask the city council for money. See Wichita City Council campaign contributions and Douglas Place for details on the campaign contributions made by these developers.

One more thing: If Holman is advocating using the results of elections as a measure of city sentiment, why oppose this election, where the ballot question addresses one issue, and there can be no confusion as to what the voters mean?

The naysayers

Holman, as do many downtown supporters, falsely frames the issue. She writes: “To oppose the Ambassador project is, in effect, to oppose downtown redevelopment.” She uses, as does Mayor Carl Brewer, the term “naysayer.” They don’t mean it as a compliment.

What I — and the people I ally myself with — oppose is subsidized development. We oppose this whether it is downtown, suburban, or elsewhere. As it turns out, we can’t even have an honest assessment of the level of public involvement in the current project under consideration. While the City of Wichita employs a very narrow definition of public involvement, a more realistic look shows that the hotel benefits from $15,470,000 in public money to get started, and then $321,499 per year for the first five years, with smaller amounts for 22 years.

Saying no to government intervention doesn’t mean saying no to progress. It does mean saying “no” to the self-serving plans of politicians and bureaucrats and the crony capitalists who seek to profit from political entrepreneurship.

It means saying “no” to Wichita’s political entrepreneurs, who seek to earn profits through government coercion rather than meeting the needs of customers in the marketplace. It means saying “no” to the public-private partnership, where all too often it is the risk that is public and the profit that is private.

So yes, I guess I and Wichita’s other naysayers are saying “no” to a lot of things.

But what we’re saying “yes” to is liberty and freedom. We’re saying “yes” to a civil society that respects the rich diversity of human individuality instead of government planning and bureaucracy. We’re saying “yes” to free people cooperating voluntarily through free markets rather than forced government transfers from taxpayers to politically-favored individuals and programs.

We’re saying “yes” to consumers choosing which businesses in Wichita thrive, rather than politicians on the city council — and their elitist sycophants — choosing. We’re saying “yes” to people making their own choices, rather than government “incentivizing” the behavior it desires through TIF districts and tax abatements, those incentives being paid for by taxpayers.

Tagged as: Capitalism, Downtown Wichita revitalization, Economic freedom, Free markets, Rhonda Holman, Subsidy, Wichita city council, Wichita city government, Wichita Eagle opinion watch

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Courtyard Hotel up again for tax breaks

by Bob Weeks on October 10, 2011

This week the Wichita City Council will consider extending property tax breaks for the Courtyard Wichita at Old Town Hotel at 820 E 2nd Street.

Five years ago when the city granted the property tax breaks, the hotel wasn’t eligible for tax increment financing. That’s because the TIF district the hotel is located in, the Old Town Cinema Redevelopment District, was running a shortfall at the time (it still is, as of December 31, 2010). Therefore, the city proposed that the hotel agree to a Payment In Lieu of Taxes, or PILOT, of $45,000 per year. That agreement has been in place for five years.

This week the city is proposing that the agreement be extended for five years. But there’s a hitch. The TIF district is not eligible to received PILOT payments under Kansas law, according to city documents. So the city proposes to charge the hotel a “bond origination fee” of $225,000, to be paid in five installments of $45,000.

To the casual observer, $45,000 seems like a lot to pay. City documents from 2006 describe it as a “substantial contribution,” and that characterization is repeated this week. But it is a small fraction of what a similar hotel would pay, if it wasn’t located in a tax-advantaged part of Wichita.

The hotel property, according to records in the Sedgwick County Treasurers Office, has an appraised value of $8,306,230 for tax year 2010. The assessed value is not given by the treasurer, as the property is tax exempt. But we can perform the calculation ourselves. Since business property is assessed for tax purposes at 25 percent of appraised value, the assessed value is $2,076,557.

If we apply the mill levy of 126.0176 (126.0176 / 1000 x $2,076,557), that means the annual property tax would be $255,453 on this property, if it weren’t tax exempt.

So the hotel, while paying $45,000 each year, is paying only 17.6 percent of what other business property with similar value is paying. As the word “substantial” has no precise meaning, each person will have to decide for themselves whether the hotel’s payments meet that definition. But when this hotel pays just $1 for every $6 that other business property pays in taxes, I think we can say the hotel made quite a deal for itself.

There is some question as to the hotel’s value, too. The recent history of this property’s appraised value, according to the Sedgwick County Treasurer’s office, is this:

Year   Land    Improvements       Total      Change
2007  $336,000   $9,634,430    $9,970,430
2008  $336,000   $9,629,420    $9,965,420     0%
2009  $336,000  $11,794,690   $12,130,690    22% increase
2010  $336,000   $7,970,230    $8,306,230    32% decrease

The valuation doesn’t affect the hotel’s tax payments for the next five years, if the city approves extending the current tax exemption. But if the city doesn’t approve the extension, the valuation matters. And in five years when the hotel is no longer eligible for tax exemptions, it will certainly matter then.

Further, there is the curious change in the valuation of the improvements to the property. From 2008 to 2009, the valuation of the improvements increased by 22 percent. Then, the next year the value dropped by 32 percent. The Sedgwick County Appraiser was not able to provide an explanation for these changes.

A question that citizens might be interested in is how in 2006 the hotel received industrial revenue bond financing in the amount of $14,135,000 — presumably all spent on the hotel — but now has an appraised value of only $8,306,230.

Further questions lie in this passage from the city’s agenda report, where it is explained that the proposed deal will “extend the maturity date and add an additional $1,750,000 of debt to Old Town Lodging for a total loan of $15,000,000 to satisfy all outstanding debt with Nationwide.”

Here the hotel proposes to take on debt of $15,000,000 when the property is appraised for just $8,306,230. And, the amount of debt the hotel is carrying is increasing. Sources in the commercial real estate industry tell me this isn’t a good sign.

Pay-to-play laws needed

Recent campaign contributions made by Jim Korroch and related parties.

This episode is another exhibit in the case for pay-to-play laws in Wichita and Kansas. The owner of the hotel, Jim Korroch, has made campaign contributions to at least three members of the current city council. Tomorrow he will ask the city council to extend the favor of allowing him to escape paying $210,453 per year in the taxes that the city demands other businesses pay. That’s a benefit of $1,052,265 over the next five years, and that’s in addition to the benefits already received.

Citizens may also remember that last year Korroch received many millions in subsidy for another downtown hotel he built.

Pay-to-play laws would prevent council members who have accepted campaign contributions from voting to enrich those who gave them. 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.”

Some council members have said that those who advocate for these laws and ask council members to refrain from voting to enrich their campaign contributors are accusing council members of accepting illegal contributions. That’s not the case. We object to what’s happening in plain sight.

Tagged as: Downtown Wichita revitalization, Economic development, Interventionism, Subsidy, Wichita city council, Wichita city government

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At Wichita City Council, facts are in dispute

by Bob Weeks on September 20, 2011

Some Wichita City Council members, including Mayor Carl Brewer criticize people who speak at council meetings for using inaccurate information. Although most citizens who speak are willing to take questions at the time they present their testimony, most council members will not engage in dialog with them, instead choosing to level their criticism at a time when the speakers are not able to defend themselves.

So let’s take a look at some of the statements made by city council members at the September 13th meeting, where the council approved by a six to one vote a package of incentives for the Douglas Place project, a downtown hotel.

James Clendenin

At the September 13th meeting, James Clendenin (district 3, south and southeast Wichita) said “I heard a lot of misinformation, and I heard a lot of good information.” He seemed to be most interested in the jobs that the hotel will create. Referring to the contention that the hotel will create 100 jobs, he said: “That’s all people ask me about — how many jobs. Just tell me jobs. I want to know jobs — jobs, jobs, jobs — people want to know jobs. I know that when Old Town was started 20 years ago, no jobs where in that part of the city. 20 years later we have jobs. … But I see people employed 20 years later that would never would have been employed unless a developer stepped up.”

I can understand the concern for jobs and how council members want to be seen doing things that they believe will create jobs. But it’s difficult to see how this hotel will create new jobs, except perhaps on the several times each year that the hotel might be used to support the larger conventions the city hopes to draw.

Instead, it’s much more likely that the hotel will simply draw most of its customers from the pool of people already planning to come to Wichita. And this hotel will have a big advantage in competing for these existing customers, especially those looking for a high-end hotel. As reported in the Wichita Eagle, the hotel developers said that without the city subsidy, the rooms would cost $250 per night. Their plans, however, are to offer the rooms for $150.

So with the help of taxpayers, the developers get to offer a $250 product for $150. That’s quite a competitive boost. My research shows that currently there are four downtown Wichita hotels offering rooms at that rate or higher. I wonder how they will feel when undercut by a taxpayer-subsidized competitor? (First, the owners of these hotels will have to realize that they, too, have received substantial subsidy.)

As to the impact of subsidies like Tax increment financing, or TIF: The important paper Tax Increment Financing: A Tool for Local Economic Development by Richard F. Dye and David F. Merriman comes to these conclusions:

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)

Later, the paper concluded: “TIF subsidies might be helping growth within the TIF district, but they are hurting growth outside the district by a larger amount.”

This paper addresses economic growth, which is not, strictly speaking, equivalent to jobs, although the two are closely related. A paper that does address the impact of TIF on jobs is from Paul F. Byrne of Washburn University. The title of the report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and in the 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. (emphasis added)

I would ask that council member Clendenin and the others read research like this before they come to their conclusions.

Furthermore, we might ask the hotel developers if they are going to run their hotel as a jobs program, or are they going to seek to minimize the use of labor, employing only as much as is required to run the hotel the way they want? In a competitive marketplace, this is what businesses are forced to do, if they want to stay in business.

Finally, the contention of Clendenin that there are people who are employed only because of Old Town is laughable.

Pete Meitzner

Newly-elected council member Pete Meitzner (district 2, east Wichita) seemed impressed and secure in that the hotel developers have agreed to personally guarantee any shortfall in property tax revenue below what is necessary to cover the payments on the bonds the city is issuing under tax increment financing.

This guarantee is quite unlikely to ever be tapped, and is an example of offering something at little risk and no cost to the developers. Then, gullible city council members lap it up.

Here’s how the arithmetic works: According to city documents, the projected debt service required to pay the TIF bonds in 2016 is $340,000. For the same year, the projected revenue from the hotel’s property tax that is applicable to the TIF bond repayments is $262,000. (Remember these property taxes are taxes the hotel must pay, no matter what they’re used for.)

For the hotel owners to become in a position where they would have to pay to cover a shortfall, the value of the hotel would have to drop by 23 percent. That’s not likely to happen, and if something like that did, it would be a signal of severe problems across the entire city, or country, for that matter.

Jeff Longwell

Speaking from the bench when he could not be rebutted by citizens, Council Member Jeff Longwell criticized citizens who testified, saying they are using “wrong numbers.” Longwell’s criticisms deserve scrutiny.

During the council meeting, there were several ratios presented as a way to evaluate the hotel, and Longwell confused them. He said: “You can argue if it’s 6 to 1, or 5 to 1, but I’ll tell you, even if it’s as low as 2.6 to 1 return, folks, that’s a great investment.”

The 6 to 1 ratio is the ratio of private investment to public investment, as calculated by the city.

The 2.6 to 1 return is a payback to the city, based on expected increased tax revenues compared to the city’s cost. This is calculated by the Wichita State University Center for Economic Development and Business Research.

The 6 to 1 ratio is based on balance sheet concepts. It refers to assets.

The 2.6 to 1 ratio is a calculation from an income statement. It refers to income relative to expenses.

The only conclusion to draw is that Longwell is sorely confused. Perhaps worse, Allen Bell, Wichita’s Director of Urban Development had just explained these numbers in response to a question by Meitzner. But Bell didn’t correct Longwell. Neither did the city manager, who undoubtedly knows the difference between the two sets of numbers.

Besides this, the 6 to 1 ratio is calculated using an extremely narrow view of the city’s investment in the project, and an overly expansive assessment of the developer’s investment. It ignores many subsidies being provided to the developers, some at city expense, and also at the expense of state and federal taxpayers.

Further, for that ratio to make any sense, you have to assume city ownership of the hotel. “We” — meaning the city of Wichita — don’t own the “6″ part of the ratio. The hotel developers do. It’s not a public asset.

Janet Miller

Like Clendenin and Longwell, Council Member Janet Miller (district 6, north central Wichita) criticized the inaccurate information presented by citizens: “A lot of the information that was shared this morning was not accurate. … I’m not going to be able to address everything.”

Here’s an example of the reasoning of Miller. Referring to the issue of tax money being diverted to the Douglas Place project, she said: “Other taxes, such as the historic and federal tax credits are not property taxes, they’re not sales taxes, those are credits toward income taxes. So unless you’re paying the income taxes those are not your taxes.”

Here Miller is ignoring the effect of tax credits on the budgets of states and the federal government. Tax credits reduce the revenue of the issuing body by the amount of the credit. So when the state of Kansas issues $3,800,000 in tax credits to the Douglas Place project, it reduces revenue to the state by that same amount.

Now if the state were to reduce its spending by that same amount, specifically based on the issuance of this tax credit, we’d be left with no impact on the state’s budget.

But the state isn’t going to to that — it never has. So taxpayers across the state must make up the difference — directly contradicting Miller’s contention that “those are not your taxes.”

The same reasoning applies to the federal tax credits of $3,500,000 that this project is seeking.

Miller also contended that the guest taxes paid by this hotel are “not your taxes.” According to the city’s budget, the purpose of the Tourism and Convention Fund, which is funded by the guest tax, is to “support tourism and convention, infrastructure, and promotion of the City.” Its outlined priorities are to be “debt service for tourism and convention facilities, operational deficit subsidies, and care and maintenance of Century II.”

So, yes, I would say that the guest tax is “our” tax. There are those who are asking for millions to renovate Century II. Since this hotel’s guest tax — most of it — will not be going to that goal, someone else has to pay.

Further, to the extent that the new hotel draws guests from other hotels, that guest tax is being diverted away from the Tourism and Convention Fund. (Of course, we have to remember that many other hotels have a similar deal to benefit from their guest taxes. Last year the city gifted the Fairfield Inn & Suites Wichita Downtown, part of the heavily subsidized WaterWalk project, $2,500,000, to be paid back by the hotel’s guest tax receipts.)

Miller also took issue with those who contend that the original plan called for Key Construction to build the parking garage: “While there was a general contractor, and that part of the project would not have been bid out, the rest of it would have been bid thorough the city’s process. So the vast majority, except for about 6 percent of the project, would have been bid out through the city’s bid project.”

Miller is specifically contradicted by the letter of intent that she voted for at the August 9th meeting of the council. The letter states: “Douglas Place LLC, will acquire and rehabilitate the Douglas Building and will construct the parking garage and urban park.”

Does she think that the principals of Key Construction — who are part of the development team of the Douglas Place project, and who have made heavy campaign contributions to Miller and others — would let someone else build the garage?

Furthermore, at the same meeting City Attorney Gary Rebenstorf said it was the developer’s preference that the garage be built without competitive bidding — again contradicting Miller’s contention that the garage would be bid on.

And if we take Miller’s statement at face value — “the vast majority, except for about 6 percent of the project, would have been bid out” — does this imply that 94 percent of the project will be bid out? This would imply that the hotel itself would be placed for public bid, and I don’t think there’s been any consideration of that.

Miller also addressed the issue of special assessment financing. That is part of the Douglas Place project, with $1,500,000 to be used for facade improvement and lead paint and asbestos removal. Miller said: “Just as a reminder: The facade improvement and asbestos removal expenses, all of that — those dollars are being repaid through special assessments. For those of you who are critical of special assessment financing, I would encourage you to look at your annual tax bill and see if it says special assessment on there. If it does, we have loaned your developer money to put in public improvements around your property. There’s a very large share of Wichita’s outstanding debt that is developers’ specials. So if we want to be critical of developers specials, that’s gonna be a really big conversation that will include all the housing developers in this city and how those dollars are lent and repaid over years.”

There’s a big distinction between the way special assessment financing is used for new development as compared to this project. On new developments, special assessment financing is used to pay for public improvements like streets, sewers, water mains, and storm water drainage. After they are built, these assets are then owned by the city. They become city assets, but were paid for by the developer.

That’s not going to happen with this hotel. Its owners will not deed over the building’s facade to the city. It will remain a private asset.

Furthermore, in new development, the assets that special assessment financing is used to pay for support development that generally ends up on the tax roles, providing the tax revenue stream that city council members promote as good. But not so with this hotel. Being in a TIF district, its property taxes — except for 30 percent — do not benefit the city, as they are used to benefit the developers.

Tagged as: Allen Bell, Carl Brewer, Downtown Wichita revitalization, Economic development, James Clendenin, Janet Miller, Jeff Longwell, Pete Meitzner, Subsidy, Tax increment financing, TIF districts, Wichita city council, Wichita city government

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In Wichita, how tax increment financing can channel tax money

by Bob Weeks on September 6, 2011

The flow of tax dollars Wichita city leaders have planned for Douglas Place, a proposed hotel in Wichita, creates a mechanism where taxpayer funds are routed to a politically-connected construction firm. And unlike the real world, where developers have an incentive to build economically, the city has created incentives for Douglas Place developers to spend lavishly in a parking garage, at no cost to themselves.

The original plan for Douglas Place as specified in a letter of intent that the city council voted to support, calls for a parking garage (and urban park) to cost $6,800,000. Details provided at the August 9th meeting of the 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.

During the meeting, it was also revealed that plans specified that Key Construction of Wichita would be the contractor for the garage. Key would not have to bid for the contract, even though the garage is being paid for with taxpayer funds.

At the meeting, Council Member Michael O’Donnell (district 4, south and southwest Wichita) expressed concern about the no-bid contract. As a result, it is likely that the contract will be put out for competitive bid. Sources say it’s possible that the garage could be built for as much as $2,000,000 less than the original plan.

However much is saved, it’s 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.

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.

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.

That’s a pretty neat deal for the Douglas Place developers. Under such a scheme, the more the parking garage costs, 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.)

Why would Douglas Place be interested in an expensive parking garage? Here are two reasons:

First, the more the garage costs to build, 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.

It’s no wonder Key Construction principals contributed $13,500 to Mayor Carl Brewer and four city council members during their most recent campaigns. Council Member Jeff Longwell 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.

Tagged as: Carl Brewer, Downtown Wichita revitalization, Interventionism, Jeff Longwell, Michael O'Donnell, Subsidy, Tax increment financing, TIF districts, Wichita city council, Wichita city government

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Kansas and Wichita quick takes: Tuesday September 6, 2011

by Bob Weeks on September 6, 2011

Live music example of overcriminilization, regulation in Wichita. The Wichita Eagle reports on examples of problems establishments have faced for not complying with Wichita’s requirement for a live music license, which costs $400 per year. In the story No entertainment license in Wichita? Live music is illegal, it is reported that city officials are working with art gallery and coffeehouse owners to revise the ordinance. I agree with Adam Hartke, who wonders why there should be any fees. Like the recently passed regulations on haunted houses, these regulations appear to be regulating something that’s not a problem.

Tax reform in Kansas. In a nine-minute podcast from the Tax Foundation, Kansas Policy Institute president Dave Trabert discusses the prospects for substantive tax reform in the Sunflower State, including the possibility of both phasing out the individual income tax and cutting (or even abolishing) the corporate income tax. Trabert says: “We probably do right now have the 15th highest state and local tax burden in the country. … That is a serious problem, because we understand how the tax burden affects job creation.” In a recent editorial, Trabert noted lack of job growth in Kansas: “Kansas is the only state whose average annual private-sector employment is below its 2010 average. Part of the reason is that, unlike most states, Kansas chose to continue raising taxes last year. … We must reduce our tax burden to create jobs and economic growth. Gradually eliminating the state income tax will have the greatest impact.” … Click on Dave Trabert on the Fight for Tax Reform in Kansas.

Downtown Wichita site launched. As part of an effort to provide information about the Douglas Place project, a proposed renovation of a downtown Wichita office building into a hotel, Americans for Prosperity, Kansas has created a website. The site is named Our Downtown Wichita, and it’s located at dtwichita.com.

Juvenile justice system to be topic. This week’s meeting (September 9th) of the Wichita Pachyderm Club features Mark Masterson, Director, Sedgwick County Department of Corrections, on the topic “Juvenile Justice System in Sedgwick County.” Following, from 2:00 pm to 3:00 pm, Pachyderm Club members and guests are invited to tour the Sedgwick County Juvenile Detention Center located at 700 South Hydraulic, Wichita, Kansas. … Upcoming speakers: On September 16, Merrill Eisenhower Atwater, great grandson of President Dwight D. Eisenhower, will present a program with the topic to be determined. … On September 23, Dave Trabert, President of Kansas Policy Institute, speaking on the topic “Why Not Kansas: Getting every student an effective education.” … On September 30, U.S. Representative Mike Pompeo of Wichita on “An update from Washington.” … On October 7, John Locke — reincarnated through the miracle of modern technology — speaking on “Life, Liberty, and Property.” … On October 14, Sedgwick County Commission Members Richard Ranzau and James Skelton, speaking on “What its like to be a new member of the Sedgwick County Board of County commissioners?” … On October 21, N. Trip Shawver, Attorney/Mediator, on “The magic of mediation, its uses and benefits.”

Campaign contributions flow to Wichita’s subsidy supporters. The Our Downtown Wichita website holds an article that details the campaign contributions made to Wichita’s mayor and several city council members by those who will be asking the city for money next week. The contributions by David Burk and Key Construction owners and affiliates are detailed in Wichita City Council campaign contributions and Douglas Place. … When the issue of campaign contributions was raised at a recent council meeting, several members became testy. Evidently, these contributions are not meant to be discussed in public.

Organ events. This Wednesday (September 7th) sees the first organ recital by Wichita State University’s Lynne Davis as part of the “Wednesdays in Wiedemann” series. These recitals, which have no admission charge, start at 5:30 pm and last about 30 minutes. … The location is Wiedemann Recital Hall (map) on the campus of Wichita State University. For more about Davis and WSU’s Great Marcussen Organ, see my story from last year. … Later this month Davis hosts Jehan Alain, 1911-1940 — The American Festival, a three-day event celebrating the music of the French organist and composer, who died at the age of 29 fighting for his country against Germany in World War II. There will be several recitals that the public may attend.

Urban planning in Wichita: an outside perspective. Randal O’Toole is a Senior Fellow at the Cato Institute and author of The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future. He visited Wichita last year and toured some of Wichita’s landmarks of government planning and taxpayer subsidy.

O’Toole also appeared on the KPTS public affairs television program Kansas Week.

Tagged as: Downtown Wichita revitalization, Kansas Policy Institute, Overcriminalization, Regulation, Wichita city council, Wichita city government, Wichita Pachyderm Club

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Our Downtown Wichita launched

September 2, 2011

As part of an effort to provide information about the Douglas Place project, a proposed renovation of a downtown Wichita office building into a hotel, Americans for Prosperity, Kansas has created a website. The site’s motto is “Limited government and free markets in Downtown Wichita benefit everyone. Centralized planning and crony capitalism benefit only a few.”

Tagged as: Americans For Prosperity, Capitalism, Carl Brewer, Downtown Wichita revitalization, Free markets, Subsidy, Taxation, Wichita city council, Wichita city government

Downtown Wichita revitalization

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