Tag Archives: TIF

Union Station development drains taxes from important needs

Testimony of John Todd to the Wichita City Council, October 7, 2014.

I want to complement the Union Station LLC group for tackling an important redevelopment project in downtown Wichita.

I am troubled however, by the developer’s request for $17.3 million in Tax Increment Finance (TIF) funding for his project because it diverts increases in future property tax revenues away from the public treasury and back to the developer for 20 years. Under current taxing levies this means that roughly one-third or $5 million plus of future Union Station property tax revenues would be diverted from the City of Wichita needed for public safety items like police and fire protection, and the building of public infrastructure. Plus, roughly one-third or $5 million plus would be diverted from the Sedgwick County treasury needed to provide for our Court System, the maintenance of property ownership records, the Sheriff’s office and detention center. The last one-third or $5 million plus would be diverted from Wichita Public Schools needed for the education of our children.

Drain, waterThe diversion of future property tax revenues away from local governmental treasuries should concern every taxpaying citizen when one considers the many needs for these funds. On the city level, $5 million over 20 years could go a long way towards funding needed street maintenance and repairs, or providing the revenue needed for a viable public bus system, and finding a long-term solution to our cities’ future water needs. Sedgwick County could use $5 million to re-open the Judge Riddel Boys Ranch that helps turn boy’s lives around and makes our community a safer place to live and play by reducing recidivism and crime. And, just think of how many teachers could be hired with $5 million to prepare our young people for productive lives and jobs.

I am of the opinion that Mr. Gary Oborny has the track record to prove that he is one of the most creative and exceptional real estate developers in the City of Wichita and that he possesses the professional talents needed to make the Union Station project work without TIF public funding.

I believe at some point downtown redevelopment needs to be market driven, stand on its own, and pay taxes into the city treasury like other city development projects do.

Today, you have the opportunity to exercise your leadership skills in achieving this transformation. I urge you to seize it.

Pink Pearl eraser

Errors in Wichita Union Station development proposal

Documents the Wichita City Council will use to evaluate a development proposal contain material errors. Despite the city being aware of the errors for more than one month, they have not been corrected.

On August 19, 2014 the Wichita City Council considered an agenda item titled “Resolution Considering the Establishment of the Union Station Redevelopment District, Tax Increment Financing.” The purpose of the item was to set October 7, 2014 as the date for the public hearing on the formation of a TIF district. The council passed this resolution.

On August 27 Bob Weeks inquired this of Wichita city officials based on information contained in city documents that were prepared for the August 19 meeting:

“On the Union station TIF proposal, there is mentioned ‘$3,766,156 in monetized historic tax credits.’ Do you know whether these are federal or state tax credits, and the face value of the credits? I presume that ‘monetized’ means the value the developers expect to receive when selling the credits at a discount.”

That same day he received this response from Allen Bell, the city’s Director of Urban Development.

“The Developer has not yet provided the City with details on the tax credits. However, staff analyzed the project to ascertain a ballpark estimate of how much it could generate in both state and federal tax credits and came up with a similar amount. We assume that $3,766,156 is the amount of net proceeds to be injected into the project from the sale of tax credits and that it is discounted from the face value of the credits.”

On follow up, Weeks asked this:

“I was also wondering which incentive program allows for the sales tax exemptions included in the CEDBR analysis.”

The response from Bell was:

“The only incentive program available to Union Station that would provide a sales tax exemption is IRBs. The Developer did not request IRBs or a sales tax exemption. I would guess that CEDBR factored it into the cost-benefit analysis to be extra conservative.”

CEDBR is the Center for Economic Development and Business Research at Wichita State University.

In addition to Bell, other city officials participating in these emails were Van Williams, Public Information Officer; Mark Elder, Development Analyst; and Scott Knebel, Downtown Revitalization Manager.

On October 2, when the city released the agenda packet for the October 7 meeting, the tax credits and sales tax information was not changed.

By the city’s admission, the value of tax credits for this project is a guess, and we don’t know if the project is actually eligible for these tax credits. The sales tax exemption included in the CEDBR is an incentive this project is not eligible for and will not receive. Despite several city officials being aware of these errors, the material the city council will consider on October 7 has not been corrected.

Wichita's Union Station in 2009

Union Station TIF provides lessons for Wichita voters

A proposed downtown Wichita development deserves more scrutiny than it has received, as it provides a window into the city’s economic development practice that voters should peek through as they consider voting for the Wichita sales tax.

Next week a Wichita real estate developer will ask the Wichita City Council to approve a package of incentives for the redevelopment of Union Station in downtown Wichita. The proposal contains many facets that citizens need to understand. Additionally, the city’s handling of this matter is something that voters will want to keep in mind as they make their decision on the proposed Wichita sales tax in November.

The city’s documents on this matter are available at Resolution Considering the Establishment of the Union Station Redevelopment District (Tax Increment Financing).

Tax increment financing

Union Station LLC is asking for TIF, or tax increment financing. Most commonly, TIF works like this: A city borrows money (by issuing bonds) and gives the cash to a development. After the project is built and has a higher assessed value, the city uses the increased property tax payments (the “increment” in TIF) from the development to pay off the bonds. This obviously is risky for cities, because if the development doesn’t generate sufficient increment in tax payments to cover the bond payments, the city will have to make up the difference. This has happened in Wichita.

In recent years a new type of TIF has been created by statute, the “pay-as-you-go” TIF. Here, instead of issuing bonds and paying off the bonds with the incremental taxes, the city simply refunds the incremental taxes to the development. City documents describe: “The TIF statute also allows for projects to be financed on a pay-as-you-go basis, to reimburse the developer for eligible costs as TIF funds are received.”

This has less risk for cities, because if the hoped-for incrementally higher property taxes don’t materialize, the development doesn’t receive TIF proceeds. There are no bonds that must be paid. The developer just doesn’t receive what was projected. This is why the city claims that pay-as-you-go TIF has no risk to the city.

(Under pay-as-you-go TIF, since the city is essentially refunding nearly all property tax payments back to the development, we have to wonder why the city requires the taxes be paid at all. Also, there is the charade of spending TIF money only on “eligible” project costs. But the criteria for eligibility is broad, and we can be sure that developers will do all they can to make sure costs are characterized as eligible. But the eligibility criteria allows cities to appear to be fiscally prudent. Cities say they don’t allow TIF proceeds to be spent on just anything, but only on eligible costs.)

Here’s what the agenda packet says about this TIF: “Union Station LLC proposes to combine pay-as-you-go TIF with private financing to finance the proposed redevelopment project. The developer will finance through private sources all costs of the redevelopment project, including TIF-eligible project costs. Pay-as-you-go TIF revenue will be used to reimburse the developer on an annual basis with proof of expenditure of TIF-eligible redevelopment project costs.”

Buried in this paragraph is some financial slight-of-hand. Wichitans need to understand this so that they can be fully informed on this proposed transaction.

The problem lies is the meanings of the terms “to finance” and “to pay for.” Financing is the process of securing money to pay the costs of acquiring something. If financing is in the form of a loan, the economics of the transaction is that the borrower receives cash (assets go up) but also incurs an obligation to pay back the cash (liabilities go up by the same amount).

Then, when the borrower uses this cash to buy something — like a historic train station — one form of asset is exchanged for another. Cash is exchanged for title to the property.

It’s in the future, as the loan is repaid, that needs examination. The goal of real estate development is that the developer creates a project that generates more money coming in than loan payments going out. If this happens, it is a signal that the developer has met customer needs and has used capital in a way that makes everyone better off.

But there’s a confounding factor involved in the “pay for” part of the transaction that the city council will consider next week. The burden of some of the loan repayments will be born by the taxpayer. We don’t know for sure, but undoubtedly Union Station LLC will borrow money to make the project work. Proceeds from the TIF will be used to make at least some of the loan payments.

This is where the slight-of-hand comes in. The city says “The developer will finance through private sources …” That much is true. The city is not loaning any money. But some of the money used to pay back the private loans will come from TIF proceeds. So it is property tax payments being re-routed back to the developer that actually pays for part of the development: “Pay-as-you-go TIF revenue will be used to reimburse the developer on an annual basis …”

This is the heart of the transaction. It’s what citizens need to understand. Instead of Union Station LLC’s property taxes being used to pay the cost of government, nearly all of these taxes will pay off the owner’s loans.

The purchase of the property

Here’s what city documents state regarding the purchase of the property: “The $6,226,156 in equity is proposed to be in the form of $1,500,000 from the purchase of the property that will be contributed as collateral, $3,766,156 in monetized historic tax credits, and $960,000 in cash.”

It’s the “purchase of the property” that needs scrutiny. More from the city documents: “The developer would be compensated for the fair market value of the land where public access improvements would be located, not to exceed the $1,500,000 actual site acquisition cost. The Public Access Easement attachment illustrates that the portions of the site where a public access easement would be acquired is 274,059 square feet and that the average land acquisition cost of 10 comparable downtown properties is $6.71 per square foot, placing the fair market value of the land where the public access improvements would be located at $1,839,147.”

What’s happening is that part of the land area of the project is being called “public access improvements.” These are things like, according to city documents, “parking structure, pedestrian boardwalk, paving, utilities, and landscaping.” The city is proposing to pay the developer $1,500,000 for these areas.

If the council agrees to this, new avenues will have been opened for spending taxpayer funds. It places other commercial developers and landlords at a disadvantage. Consider, say, the recent Whole Foods Market that opened in Wichita. What Union Station LLC wants is like that developer asking to be reimbursed for the shrubs and grass that was planted, or the parking spaces that are provided. The public will, after all, view the sunlight reflected from the grass and breathe the oxygen generated by the shrubs. And, the public will park in the spaces. These “public access improvements” are part of what is necessary to provide an attractive and desirable development. It’s part of what businesses do to attract customers and earn profits. But the Union Station developer is asking that the city pay him for providing these things. If the council agrees to this, we can expect to see this template applied repeatedly in the future.

The missing tax credits

City documents state this regarding the sources of funds for the project: “Private to Public Investment Ratio — The proposed private capital investment is $36,578,000, and the proposed public capital investment is $17,321,000, resulting in a private to public capital investment ratio of 2.1 to 1.” But missing from this calculation is the contribution of taxpayers in the form of historic preservation tax credits. As reported above, the city reports the project will receive $3,766,156 in monetized historic tax credits.

(Tax credits are economically equivalent to a grant of cash from government. Commonly their value is used to boost the “private” equity contribution to the project. But since the tax credits come from government, we ought to call it the “peoples’ equity.”)

I inquired of city officials whether the historic preservation tax credits are federal, state, or both. The answer I received: “The Developer has not yet provided the City with details on the tax credits. However, staff analyzed the project to ascertain a ballpark estimate of how much it could generate in both state and federal tax credits and came up with a similar amount. We assume that $3,766,156 is the amount of net proceeds to be injected into the project from the sale of tax credits and that it is discounted from the face value of the credits.”

So it seems like the city is surmising things that may or may not be part of the developer’s plan.

False sales tax exemption applied

There’s another level of uncertainty in the city documents. In the analysis performed by Center for Economic Development and Business Research at Wichita State University, about $1.8 million in sales tax exemptions are included in the analysis. In my reading of the project documents, I didn’t see the project qualifying for sales tax exemptions. Upon inquiry to the city, I received this response: “The only incentive program available to Union Station that would provide a sales tax exemption is IRBs. The Developer did not request IRBs or a sales tax exemption. I would guess that CEDBR factored it into the cost-benefit analysis to be extra conservative.”

It appears there is a lack of communication between the city and CEDBR. More surmising. Exactly which incentives are available to be tapped by this project, and in what amount? Can we trust the analysis from CEDBR if it includes incentives that the project has not requested and is not eligible to receive?

Benefit-cost ratios

Benefit-cost ratios of Union Station LLC project for City of Wichita. Click for larger version.
Benefit-cost ratios of Union Station LLC project for City of Wichita. Click for larger version.
The city has a policy that economic development projects should have a benefit-cost ratio of 1.3 to 1 or greater. For this project, CEDBR reports these ratios:

City General Fund, 1.04
City Debt Service Fund, 1.15
Total City, 1.08
Sedgwick County, 1.06
State of Kansas, 1.66
School district, 7.19

For the city and county, the ratios are far below 1.3 to 1. There are many exceptions and loopholes in the incentive policy that allows the city to participate in projects with less than the 1.3 ratio.

The (un)certainty of city policies

For this project we see that city policy is being modified on the fly to meet the circumstances of a particular project. This is not necessarily bad. Entrepreneurship demands flexibility. But the city promises certainty in its standards, and city officials say Wichita has a transparent, open government. The Public-Private Partnership Evaluation Criteria for the redevelopment of downtown Wichita states “The business plan recommends public-private partnership criteria that are clear, predictable, and transparent.”

But as in the past, we find the city’s policies are anything but predictable and transparent. City documents state: “In the opinion of the evaluation team, the established criteria do not adequately address projects such as Union Station where the requested incentives do not involve City debt.” So we see the “clear, predictable, and transparent” policies discarded and reformulated. How are future developers supposed to know which policies can be waived or rewritten? How are citizens supposed to trust that city hall is looking out for their interests when policies are so fluid?

Wichita City Library, 1965

What incentives can Wichita offer?

Wichita government leaders complain that Wichita can’t compete in economic development with other cities and states because the budget for incentives is too small. But when making this argument, these officials don’t include all incentives that are available.

In making the case for an economic development fund paid for by a sales tax, the argument goes like this: “Wichita and Sedgwick County compete conservatively with incentives. The City of Wichita and Sedgwick County have a total of $1.65 million in new uncommitted funds for cash incentives this year with any unused money going back to the general fund.” (Will Wichita Accelerate Competition for Primary Jobs?, presentation made to Wichita city council.)

This statement is true only if we use a very narrow definition of the word “incentive.” By any reasonable definition, Wichita has many incentives worth much more than what is claimed by Wichita economic development officials and politicians.

In fact, the report cited above contains contradictory information about the amounts that are available for economic development incentives in Wichita. Here is an example: “The $4.5 million PEAK program incentive from the Kansas Department of Commerce was an important factor in keeping NetApp in Wichita. Locally we were able to provide $836,000 in incentives.”

So with an incentives budget of $1.65 million, a Wichita company received $5.3 million in incentives. Some of that, like the PEAK incentive, is paid over a period of years. But that amount doesn’t begin to describe the benefits NetApp received.

Available incentive programs

Kansas Department of Commerce logoA letter to NetApp from the Kansas Department of Commerce laid out the potential benefits from the state. As detailed in the letter, the programs with potential dollar amounts are:

  • Promoting Employment Across Kansas (PEAK), up to $7,705,535
  • Kansas Industrial Training with PEAK, up to $160,800
  • sales tax savings of $6,880,000
  • personal property tax exemption, $11,913,682
  • High Performance Incentive Program (HPIP), $8,500,000

The total of these is $35,160,017. Some of these benefits are paid over a period of years. The PEAK benefits are payable over seven years, according to the letter, so that’s about $1.1 million per year. These are potential benefits; the company may not actually qualify for and receive this entire amount. But it’s what the state offered.

It’s true that some of these programs are not cash incentives of the type Wichita complains of lacking. But if a company is going to make purchases, and the state says you can skip paying sales tax on the purchases — well, that’s as good as cash. $6,880,000 in the case of NetApp, according to the Kansas Department of Commerce.

Local tax exemptions

Besides sales tax exemptions, the city has other types of tax exemptions it regularly offers. These exemptions can have substantial value. In 2008 as Drury contemplated Broadview Hotel 2013-07-09 020purchasing the Broadview Hotel, the city allowed the hotel to escape paying much of the taxes that the rest of us have to pay. According to city information, Drury planned to spend $22,797,750 on the hotel. If we use this as the appraised value for the property when it is complete, the annual property taxes due for this property would be $22,797,750 times .25 times 126.323 divided by 1000, or $719,970. This calculation may be rough, but it gives us an approximation of the annual operating subsidy being given to this hotel for the next ten years.

It's important for citizens to know incentivesWhen Boeing announced in 2012 that it was closing its Wichita operations, city leaders complained that Boeing was leaving Wichita even though it had received many incentives. From 1979 to 2007, Boeing received tax abatements through the industrial revenue bond process worth $658 million, according to a compilation provided by the City of Wichita. (This is not money the city lent or gave to Boeing. IRBs provide a vehicle for granting tax abatements or exemptions.) At the time, city officials said the average amount of bonds was $120 million per year. With Wichita commercial property tax rates at 3.008 percent ($30.08 per $1,000 of appraised value), according to GWEDC, that’s a tax savings of around $3.6 million per year. To Boeing, that’s as good as receiving cash year after year.

Tax increment financing

In 2013 Wichita approved a package benefiting Exchange Place in downtown. Here’s what the city council agenda packet gives as the sources of financing for this project.

HUD Loan Amount         $29,087,700
Private Equity            5,652,254
Tax Credit Equity        19,370,395
TIF Proceeds             12,500,000
Total Sources of Funds  $66,610,349

TIF, or tax increment financing, diverts future increased tax revenues away from their normal uses and diverts them back to the project. In this case, the city will borrow $12,500,000 by selling bonds. It will give this money to the developer. Then, TIF proceeds will be used to repay these bonds.

Some will argue that TIF isn’t really an incentive. The owners of the property will have to pay their property taxes, just like any other property owner. But for this project, the property taxes are used for the project’s own benefit instead of funding the costs of city government. This project gets to spend $12.5 million of its property tax payments on itself, rather than funding the costs of Wichita city government.

Tax credits

Ambassador Hotel sign 2014-03-07Note that the sources of financing for the Exchange Place project includes “Tax Credit Equity.” Here’s an example of another downtown project, the Ambassador Hotel, and the incentive package the city prepared:

  • $3,325,000 in tax increment financing.
  • $4,245,000 in city funding under the capital improvement plan (CIP), to build parking for the hotel.
  • $3,800,000 in tax credits from the State of Kansas.
  • $3,500,000 in tax credits from the U.S. government.
  • $537,075 in sales tax exemptions on purchases during the construction and furnishing of the hotel.
  • $60,000 per year in community improvement district (CID) sales tax. The hotel charges an extra two cents per dollar sales tax, which the state returns to the hotel.
  • $127,499 per year (estimated) in rental revenue to the developers from a sweetheart lease deal.
  • Participation in Wichita’s facade improvement program, which provides special assessment financing that is repaid.

All told, this project was slated to receive $15,407,075 in taxpayer funds to get started, with additional funds provided annually.

The tax credits for this project are historic preservation tax credits. They have the same economic impact as a cash payment. The federal tax credits are available across the country, while the Kansas tax credits, of course, are a state program. In this case the hotel developers received an upfront payment of $3.8 million from the state in a form that’s as good as cash.

STAR bonds

Last year a STAR bonds district in northeast Wichita was approved to receive $31,570,785 from these bonds. The STAR bonds are paid off with sales tax revenue that would otherwise go to the state and overlapping jurisdictions. This is sales tax collected from the business’s customers, and doesn’t cost the business anything.

Adding it up

This list is not complete. There are other programs and other beneficiaries of economic development subsidies. With this in mind, it is disingenuous for city and other officials to use the $1.65 million figure as though it was all Wichita had to offer. It’s important for citizens to know that contrary to the claims of officials, Wichita has many economic development incentive programs available, and some have substantial value to the recipients, with corresponding cost to the city and other jurisdictions.

Kansas Capitol

Kansas budgeting “off the tops” is bad policy

From Kansas Policy Institute.

Budget “Off The Tops” Bad Policy

By Steve Anderson

Direct transfers of taxpayer money sent to a specific business or industry is always a tough sell to politicians, let alone the voting public. But, that is why some corporations pay lots of money to lobbyists. If we can’t get a company more revenue (via a taxpayer-funded payment) why don’t we lower their expenses via a tax loophole that lowers how much they pay in taxes?

These sort of special interest tax breaks come in a variety of different forms but the net effect of each is the same — revenues are diverted from the appropriation process and instead sent to some “special” group. A shrewd lobbyist will often make sure the program is funded in a way that their client(s) will receive their funding even if the statute is changed in the future. However, that should not preclude bringing these special interest deals to an end. This is especially important given that the reduction in tax rates will increase the impact of these programs on the revenue stream even as the state continues along the path to eliminating the individual income tax.

These transfer schemes are funded in a number of different ways that obscure the transaction from both the public and the appropriation process. For example, there are a number of these special deals that are funded by payroll withholding taxes. The payroll withholding exemptions are programs where the state abates collection of state income tax withheld on employee’s wages. The state then provides either a program or directly funds some benefit for the employer. These programs come in many forms and often are nearly impossible to find within the very complex tax and revenue reporting statements. In general these programs require relatively long commitments by the state of taxpayer funds. The discontinuance of these type of programs will not generally eliminate the programs immediately but it will create savings going forward that could be substantial to the maintenance of a stable fiscal environment and a more transparent tax code. It would also be a breach of trust, on some level, to yank away a promise made by the state to an entity or individual. But, that doesn’t mean we have to let these program exist into perpetuity.

Investments in Major Projects and Comprehensive Training (IMPACT)

IMPACT provides for major project investment to provide financial assistance to defray business costs. IMPACT uses withholding revenue for a direct funding source to pay for bonds issued by the state for projects. In fiscal year 2013 that percentage was 2% and the program expended $25,420,654 of funds that otherwise would have gone to the state coffers. The good news is that Kansas stopped issuing bonds in the IMPACT program effective Dec. 31, 2011. The bad news was it was replaced with other programs that are very similar. The IMPACT payments will extend on for a number of years in to the future because of the bond’s that funded those projects. This ability to bind future legislators and taxpayers to these sort of “deals” is, in and of itself, problematic but there is more damage done to the state of Kansas than just the direct cost of these bonds.

Bad policy like the type of special interest payment that IMPACT represents often have negative impacts in the future that are not foreseen at the time of their passage. For example, the IMPACT bonds were at the heart of the recent Moody’s down grade of the Kansas state bond rating. The IMPACT bond’s ratings were reviewed by Moody’s rating agency because the funding source to pay off the bonds — withholding taxes — was being reduced by a cut in the tax on wage earners in the state income tax rates. The media, which generally is not comprised of individuals with a financial background, reported that the change in the IMPACT bond ratings were caused by the broad tax cuts, which is only partially true. What the media in general did not report, at least not with the same enthusiasm as their portrayal of the impact of the income tax cuts, was that Moody’s noted the long running unfunded liabilities of the Kansas Public Employees Retirement System (KPERS) and the lack of spending cuts as key elements of their downgrade.

However, analysis of the IMPACT bond rating issues bring to light another important problem with these type of giveaways. Future legislators have their hands tied because their predecessors have committed future tax revenues in a manner that precludes the ability to bring an immediate cessation, or even partial reduction, in the special interest funding source without repercussions such as the recent bond rating issue.

Promoting Employment Across Kansas (PEAK)

The PEAK program allows companies that create 100 new jobs within a specified two-year period to retain 95% of employee withholding taxes for up to 10 years. Not surprisingly with such a generous incentive companies have grown its use rapidly going from $2.7 million in expenditures in 2010 to an estimated $12.5 million in 2012 years. The “cap” on this program going forward is: In FY 2014, the cap is $12 million. In FY 2015, the cap is $18 million, $24 million in FY 2016, $30 million in FY 2017, $36 million in FY 2018, and $42 million 2019. Immediately freezing the cap at the current level and eliminating the program going forward to prevent new obligations generates significant savings going forward for the state. This is giveaway is even more troubling when considering that a recent analysis from Kansas City’s Kauffman Foundation found that, “PEAK incentives recipients are statistically not more likely to generate new jobs than similar firms not receiving incentives.”

Kansas Bioscience Authority (KBA)

The KBA’s short lifespan is a microcosm of what can go wrong with the concept of dedicated directed funding. The lack of transparency created by bypassing the scrutiny of the appropriation process often leads to expenditures that generate headlines but don’t create economic growth.

The legislation that created the KBA produced a number of programs and funding streams. It also set the total funding limit to the authority over 15 years at almost $582 million. The funding was to be for a period of 15 years from the effective date of the establishment of the KBA and required the State Treasurer to annually pay 95% of withholding above the certified base, as certified by the Secretary of Revenue, on Kansas wages paid by bioscience employees to the bioscience development (code categories from NAISC) and investment fund of the KBA.

The amount of funding transferred to the KBA grew from almost $20 million in 2006 to nearly $36 million by 2008 before the creation of the annual funding cap of $35 million in 2009. Issues with operations and management emerged in 2011 which led to a forensic audit by an outside CPA firm. The audit pointed to a number of issues that led subsequent legislatures to reduce the Authority’s funding to $11.3 million in 2012, $6.3 million in 2013, and $4.0 million in 2014 (KBA funding history here). It is doubtful that the current Administration or legislatures would increase funding above current levels but the $35 million is still the statutory cap leaving open that possibility.
There is a secondary issue with KBA’s statutory cap caused by the treatment of these type of dedicated directed funding in the budgeting process. These statutory caps for entities like KBA are considered to be at their cap amount when forecasting future budgets. The $35 million of KBA statutory cap, for example, creates an illusion in fiscal impact statements issued by the Kansas Legislative Research Department (KLRD) because those statements show the full statutory amount of $35 million being spent every year for the five years they project. Based on the current trend line of KBA funding this will not happen and, instead, creates a significant overstatement of expenditures and helps create fiscal deficits where none may exist. These projections are used by legislators and the media and should strive to present as accurate a picture as possible of current and possible future realities. A more proper and accurate display of these type of funded programs for five year projections like KLRD produces would consider whether spending could be altered or removed completely. This should be reflected in either the actual amount shown, if there was a history of partial funding, or, at the very least, in a separate line item with a notation that the sum could be arbitrarily reduced or eliminated.

Job Creation Fund

Another of those dedicated directed funds is the Job Creation Fund (JCF). The Job Creation Program Fund or the “deal closing” fund, its more press-friendly moniker, lets the state, led by the Office of the Governor, make investments and extend incentives aimed at attracting or retaining businesses within a range of statutory guidelines. The funding for the JCF was from the elimination of three other credits: Kansas Enterprise Zone, Job Expansion and Investment Credit Act and a refundable credit for property taxes paid on machinery and equipment. This sort of reallocation of funding sources carry the coveted title of “revenue neutral” and hence have no fiscal impact statement for legislators to worry about when the funding was created. This allowed elected officials to be able to say on one hand they eliminated special interest funding while creating another special interest fund out of the “elimination” of those entities. The annual cap on JCF funds is $10 million which is how much could be immediately saved by letting JCF join its now-defunct predecessors in state history.

Transfers Out of the State General Fund

There is another area where what would be State General Funds are diverted from the appropriation process. There are a number of transfers out of the State General Fund with the largest and most notorious being the $135 million School District Improvements Fund. Not only does this amount not get counted in the school formula, the recent Gannon ruling on school funding pointed directly to this fund as an example of inequity in funding. This “inducement” to issue bonds for new buildings was a bad idea both from a policy and process aspect. Policy-wise the Kansas Supreme Court’s Gannon ruling was correct in pointing out that only the growing school districts could use this fund with a few big school districts garnering most of the monies. Process-wise the choice to use a transfer as the funding mechanism not only bypassed the school finance formula but also ensured that these funds are not counted by the National Center for Education Statistics; NCES is the “go to” place for comparing education-related data from across the country and is run by the U.S. Dept. of Education.

There is also another series of transfers that have their own particular issues.The adjacent list shows the recipient and the amount for FY-2015 (available at link above).The picking of winners and losers by government is never a good idea and the direct transfer of taxpayer funding to companies is a suspect type of economic development.

Transfers out of the State General Fund
Spirit Aerosystems Incentive ($3,500,000)
Eaton MDH Spec. Qual. Indus. Mfg. Fund ($30,000)
Siemens Manufacturing Incentive ($650,000)
Learjet Incentive ($6,000,000)
TIF Replacement Fund ($900,000)
Learning Quest Match  ($500,000)
Total ($11,580,000)

It is also troubling when local communities enter into Tax Increment Finance (TIF) arrangements, not to mention other subsidy giveaways, which are basically an agreement between a company or individual and the city to suspend property tax payments for that company or individual. State taxpayers as a whole have to make up for lost revenues to the governing body of each such city from the TIF arrangement. This means that a TIF issued in Johnson County is, at least in part, paid for by residents of Bourbon County and Elkhart. This distribution of funds from taxpayers across the state to individual “redevelopment areas” that were created by local governments in a manner that is basically hidden from the citizens is another great example of why these “off the tops” are bad policy. Requiring these TIF subsidies to be debated in the light of the full appropriation process would no doubt lead to questions by legislators whose districts did not include cities who receive this subsidy.

A general thought for legislators, citizens and industry on these economic subsidies. The reduction in income tax rates by the state on withholding rates has already provided a huge incentive for these companies in addition to the direct largess they receive from these dedicated funds. The rate cut on withholding taxes increased the take home pay of their employees without those companies having to give a pay raise to their employees out of company funds. Note that the “incentive” of lower withholding taxes is applied to EVERY wage earner in the state and does not go about picking favored businesses, industries, or individuals. This type of transparent, rules-based, and equally-applied policy is the correct way to encourage economic growth and allow the free market to dictate outcomes not politicians or bureaucrats.

Conclusion

Every program that spends the funds of the taxpayer should be examined regularly and the nature of these “off the tops” suggests that is not happening. The need for transparency and accountability is especially true of programs that benefit any specific individual, company or sector of the economy at the expense of another. Because of the contractual type of arrangement some of these represent we do not advocate for the state breaking existing contracts in regards to incentives. But, the creation of new or expansion of existing economic development handouts that are direct redistributions from taxpayers to other sectors of the economy needs to be halted and those still in existence need to be reviewed.

A complete review of every agreement entered into by the state to ascertain if that agreement is contractual in nature or are not legally binding going forward should proceed this next legislative session. The state should review those that are not legally binding and current renewals that can be foregone and put this “off the top” funding back in the appropriation process going forward. How much could the state expect to realize would be determined by that review. Even a preliminary, informed estimate would be in the neighborhood of $50 million annually without breaking any contractual arrangements. The following chart gives an estimate of just three programs with statutory flexibility.

Total Dollars Returned to the State Coffers
$s in Millions FY16 FY17 FY18 FY18
Freeze PEAK at Current Levels $6 $12 $18 $24
Kansas Bioscience Authority $25 $25 $25 $35
Cease Job Creation Fund $10 $10 $10 $10
Totals $41 $47 $53 $69
The issue of transparency is front and center in all of these programs and it would be appropriate for every “off the top” to be displayed on both Consensus Revenue Estimates and Appropriation profiles so that legislators and citizens can see that a significant amount of funds have already been appropriated by these arrangements.

WichitaLiberty.TV set 2014-04-29 01 800

Wichita: We have incentives. Lots of incentives.

In this excerpt from WichitaLiberty.TV: Wichita government leaders complain that Wichita can’t compete in economic development with other cities and states because the budget for incentives is too small. But when making this argument, these officials don’t include all incentives that are available. View below, or click here to view on YouTube. More information on this topic is at Contrary to officials, Wichita has many incentive programs.

Wichita city hall

Contrary to officials, Wichita has many incentive programs

Wichita government leaders complain that Wichita can’t compete in economic development with other cities and states because the budget for incentives is too small. But when making this argument, these officials don’t include all incentives that are available.

The document Will Wichita Accelerate Competition for Primary Jobs? contains contradictory information about money available for economic development incentives in Wichita. The usual argument that officials make is represented by this quotation from the report: “Wichita and Sedgwick County compete conservatively with incentives. The City of Wichita and Sedgwick County have a total of $1.65 million in new uncommitted funds for cash incentives this year with any unused money going back to the general fund.”

But the same report contains this: “The $4.5 million PEAK program incentive from the Kansas Department of Commerce was an important factor in keeping NetApp in Wichita. Locally we were able to provide $836,000 in incentives.”

So with an incentives budget of $1.65 million, a Wichita company received $5.3 million in incentives. Some of that, like the PEAK incentive, is paid over a period of years. But that amount doesn’t begin to describe the benefits NetApp received.

A sample of available incentive programs

Kansas Department of Commerce logoA letter to NetApp from the Kansas Department of Commerce laid out the potential benefits from the state. As detailed in the letter, the programs with potential dollar amounts are: Promoting Employment Across Kansas (PEAK), up to $7,705,535; Kansas Industrial Training with PEAK, up to $160,800; sales tax savings of $6,880,000; personal property tax exemption, $11,913,682; and High Performance Incentive Program (HPIP), $8,500,000. The total of these is $35,160,017. Some of these benefits are paid over a period of years. The PEAK benefits are payable over seven years, according to the letter, so that’s about $1.1 million per year. These are potential benefits; the company may not actually qualify for and receive this entire amount. But it’s what the state offered.

It’s true that some of these programs, strictly speaking, are not “cash incentives” of the type Wichita complains of lacking. But if a company is going to make purchases, and the state says you can skip paying sales tax on the purchases — well, that’s about as good as cash. $6,880,000 in the case of NetApp, according to the Kansas Department of Commerce.

Local tax exemptions

Besides sales tax exemptions, the city has other types of tax exemptions it regularly offers. These exemptions can have substantial value. In 2008 as Drury contemplated Broadview Hotel 2013-07-09 020purchasing the Broadview Hotel, the city allowed the hotel to escape paying much of the taxes that the rest of us have to pay. According to city information, Drury planned to spend $22,797,750 on the hotel. If we use this as the appraised value for the property when it is complete, the annual property taxes due for this property would be $22,797,750 times .25 times 126.323 divided by 1000, or $719,970. This calculation may be rough, but it gives us an idea of the annual operating subsidy being given to this hotel for the next ten years. Remember, city officials complain of an incentives budget of only $1.65 million per year.

It's important for citizens to know incentivesWhen Boeing announced in 2012 that it was closing its Wichita operations, city leaders complained that Boeing was leaving Wichita even though it had received many incentives. From 1979 to 2007, Boeing received tax abatements through the industrial revenue bond process worth $658 million, according to a compilation provided by the City of Wichita. At the time, city officials said the average amount of bonds was $120 million per year. With Wichita commercial property tax rates at 3.008 percent ($30.08 per $1,000 of appraised value), according to GWEDC, that’s a tax savings of around $3.6 million per year. To Boeing, that’s as good as receiving cash year after year. Remember, city officials say the incentives budget is $1.65 million per year.

Tax increment financing

In 2013 Wichita approved a package benefiting Exchange Place in downtown. Here’s what the city council agenda packet gives as the sources of financing for this project.

HUD Loan Amount         $29,087,700
Private Equity            5,652,254
Tax Credit Equity        19,370,395
TIF Proceeds             12,500,000
Total Sources of Funds  $66,610,349

TIF, or tax increment financing, diverts future increased tax revenues away from their normal uses and diverts them back to the project. In this case, the city will borrow $12,500,000 by selling bonds. It will give this money to the developer. Then, TIF proceeds will be used to repay these bonds.

Some will argue that TIF isn’t really an incentive. The owners of the property will have to pay their property taxes, just like any other property owner. But for this project, the property taxes are used for the project’s own benefit instead of paying for city government. This project gets to spend $12.5 million of its property tax payments on itself, rather than funding the costs of Wichita city government.

Tax credits

Ambassador Hotel sign 2014-03-07Note that the sources of financing for the Exchange Place project includes “Tax Credit Equity.” Here’s an example of another downtown project, the Ambassador Hotel, and the incentive package the city prepared:

  • $3,325,000 in tax increment financing.
  • $4,245,000 in city funding under the capital improvement plan (CIP), to build parking for the hotel.
  • $3,800,000 in tax credits from the State of Kansas.
  • $3,500,000 in tax credits from the U.S. government.
  • $537,075 in sales tax exemptions on purchases during the construction and furnishing of the hotel.
  • $60,000 per year in community improvement district (CID) sales tax. The hotel charges an extra two cents per dollar sales tax, which the state returns to the hotel.
  • $127,499 per year (estimated) in rental revenue to the developers from a sweetheart lease deal.
  • Participation in Wichita’s facade improvement program, which provides special assessment financing that is repaid.

All told, this project was slated to receive $15,407,075 in taxpayer funds to get started, with additional funds provided annually.

The tax credits for this project are historic preservation tax credits. They have the same economic impact as a cash payment. The federal tax credits are available across the country, while the Kansas tax credits, of course, are a state program. In this case the hotel developers received an upfront payment of $3.8 million from the state in a form that’s as good as cash. Remember, city officials say the incentives budget is $1.65 million per year.

STAR bonds

There are more programs the city and state use to provide incentives. Last year, according to city documents, a STAR bonds district in northeast Wichita was approved to receive $31,570,785 from these bonds. The STAR bonds are paid off with sales tax revenue that would otherwise go to the state and overlapping jurisdictions. This is sales tax collected from the business’s customers, and doesn’t cost the business anything. Remember, city officials say the incentives budget is $1.65 million per year.

This list is not complete. There are other programs and other beneficiaries of economic development subsidies. It’s important for citizens to know that contrary to the claims of officials, Wichita has many economic development incentive programs available, and some have substantial value to the recipients, with corresponding cost to the city and other jurisdictions.

Wichita City Hall.

Wichita’s legislative agenda favors government, not citizens

city-council-chambers-sign-smallThis week the Wichita City Council will consider its legislative agenda. This document contains many items that are contrary to economic freedom, capitalism, limited government, and individual liberty. Yet, Wichitans pay taxes to have someone in Topeka promote this agenda. I’ve excerpted the document here, and following are some of the most problematic items.

Agenda: Existing economic development tools are essential for the continued growth and prosperity of our community.

First. The premise of this item is incorrect. We don’t have growth and prosperity in Wichita. Compared to a broad group of peer metropolitan areas, Wichita performs very poorly. See For Wichita’s economic development machinery, failure for details.

Second: In general, these incentives don’t work to increase prosperity. Click here for a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view. “Peer-reviewed” means these studies were stripped of identification of authorship and then subjected to critique by other economists, and were able to pass that review.

Third: Wichita leaders often complain that Wichita doesn’t have enough “tools in the toolbox” to compete effectively in economic development. The city’s document lists the tools the city wants the legislature to protect:

  • 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

That’s quite a list of incentive programs. 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.

Agenda: GWEDC/GO WICHITA: Support existing statutory records exemptions

This may refer to the city wanting to prevent these agencies from having to fulfill records requests under the Kansas Open Records Act. (If so, I wonder why the Wichita Downtown Development Corporation was left off.) City leaders say Wichita has an open and transparent government. But Kansas has a weak records law, and Wichita doesn’t want to follow the law, as weak as it is. This is an insult to citizens who are not able to access how their taxes are spent. For more on this issue, see Open Records in Kansas.

Agenda: The Wichita City Council opposes any legislative attempts to restrict the taxing and spending authority of local governments.

As Wichita city leaders prepare to ask for a higher sales tax rate in Wichita, we can hope that the legislature will save us from ourselves. At best, we can hope that the legislature requires that all tax rate increases be put to popular vote.

Agenda: The Wichita City Council opposes any restrictions on the use of state and/or local public monies to provide information to our citizens and to advocate on their behalf.

This is the taxpayer-funded lobbying issue. As you can see in this document, many of the things that Wichita city leaders believe people want, or believe that will be good for their constituents, are actually harmful. Additionally, many of the methods the city uses to engage citizens to determine their needs are faulty. See In Wichita, there’s no option for dissent for an example. Also, see Wichita survey questions based on false premises.

Agenda: The Wichita City Council supports the current framework for local elections, continuing the current February/April schedule of local primary and general elections, as well as the local option allowing non-partisan elections.

The present system of non-partisan elections held in the spring results in low voter turnout that lets special interest groups exercise greater influence than would be likely in fall elections. See my legislative testimony in Kansas spring elections should be moved.

Agenda: The Wichita City Council supports the development of appropriate state and local incentives to nurture and preserve arts activity throughout the City of Wichita and the State of Kansas.

Translation: The city knows better than you how to provide for your entertainment and cultural edification, and will continue to tax you for your own benefit.

Agenda: Public support and awareness of the possibility of passenger rail service connecting Oklahoma City and Wichita/Newton has grown over the past two years.

I’m not sure where the claim of public support and awareness growing comes from, but people are definitely not informed about the economics of passenger rail. In 2010, when the state rolled out several plans for this passenger rail service link, I reported as follows:

Expansion of rail service in Kansas is controversial, at least to some people, in that any form of rail service requires taxpayer involvement to pay for the service. First, taxpayer funding is required to pay for the start-up costs for the service. There are four alternatives being presented for rail service expansion in Kansas, and the start-up costs range from $156 million up to $479 million.

After this, taxpayer subsidies will be required every year to pay for the ongoing operational costs of providing passenger rail service. The four alternatives would require an annual operating subsidy ranging from $2.1 million up to $6.1 million. Taking the operating subsidy and dividing by the estimated number of passengers for each alternative, the per-passenger subsidy ranges from $35 up to $97 for every passenger who uses the service.

It would be one thing if tickets sales and other revenue sources such as sale of food and beverage paid for most of the cost of providing passenger rail service, and taxpayers were being asked to provide a little boost to get the service started and keep it running until it can sustain itself. But that’s not the case. Taxpayers are being asked to fully fund the start-up costs. Then, they’re expected to pay the majority of ongoing expenses, apparently forever.

Also, in Amtrak, taxpayer burden, should not be expanded in Kansas I reported on the Heartland Flyer route specifically. This is from 2010, but I doubt much has changed since then.

For the Heartland Flyer route, which runs from Fort Worth to Oklahoma, and is proposed by taxpayer-funded rail supporters to extend into Kansas through Wichita and Kansas City, we find these statistics about the finances of this operation:

Amtrak reports a profit/loss per passenger mile on this route of $-.02, meaning that each passenger, per mile traveled, resulted in a loss of two cents. Taxpayers pay for that.

But this number, as bad as it is, is totally misleading. Subsidyscope calculated a different number. This number, unlike the numbers Amrak publishes, includes depreciation, ancillary businesses and overhead costs — the types of costs that private sector businesses bear and report. When these costs are included, the Heartland Flyer route results in a loss of 13 cents per passenger mile, or a loss of $26.76 per passenger for the trip from Fort Worth to Oklahoma City.

Asking the taxpayers of Wichita to pay subsidies each time someone boards an Amtrak train: This doesn’t sound like economic development, much less a program that people living in a free society should be forced to fund.

Exchange Place still not good for Wichita, others

Wichita city hall logo

Tomorrow the Wichita City Council will consider a redevelopment plan for the Exchange Place project in downtown Wichita. Despite having shed the problems with the former owners, the project has become an even worse deal for the taxpayers of Wichita, Kansas, and the nation. Those looking for jobs and for investment capital to meet consumer demands are worse off, too.

Here’s what the city council agenda packet gives as the sources of financing for this project.

HUD Loan Amount         $29,087,700
Private Equity            5,652,254
Tax Credit Equity        19,370,395
TIF Proceeds             12,500,000
Total Sources of Funds  $66,610,349

Consider each of these sources of funding. TIF, or tax increment financing, diverts future increased tax revenues away from their normal uses and diverts them back to the project. In this case, the city will borrow $12,500,000 by selling bonds. It will give this money to the developer. Then, TIF proceeds will be used to repay these bonds.

It sounds innocent, even beneficient and desirable. But if this project was not built within a TIF district, it would add $12,500,000 in tax revenues to the city, county, and school district. This is called “building up the tax base,” something politicians and bureaucrats say is an important goal. Downtown Wichita, however, has not done well in this regard, despite the claim of hundreds of millions in investment.

City leaders will tell us that tax increment financing is needed for economic development. Regarding the effect of tax increment financing districts on economic development, economists Richard F. Dye and David F. Merriman have studied tax increment financing extensively. Their paper The Effects of Tax Increment Financing on Economic Development bluntly states the overall impact of TIF: “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not.”

Later in the same paper the authors conclude: “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.”

What about the effect of tax increment financing on job creation, that being another goal mentioned by politicians and bureaucrats? One person who has looked at the effect of TIF on jobs is Paul F. Byrne of Washburn University. He authored a recent report titled Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth. In its abstract we find this conclusion regarding the impact of TIF on jobs: “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.” This project is a retail project, and can be expected to have a negative effect on employment.

Another bad aspect of this project for citizens is what city documents describe as “tax credit equity.” The amount is $19,370,395. This is understatement at its finest. Tax credits are a direct transfer from taxpayers to the project developers, with very few strings attached.

A tax credit is an appropriation of money made through the tax system and economically equivalent to a direct grant of money. Recently some have started to use the word “tax appropriations” or “tax expenditures” to describe tax credits in recognition of this. These expenditures don’t go through the normal legislative process as do most appropriations. If the Kansas Legislature and United States Congress are not comfortable with writing this developer a check for over $19,000,000, they should not make a roundabout contribution through the tax system that has the same economic impact on the state’s and nation’s finances.

Citizens will be told that the tax credits are needed because rehabbing historic buildings is expensive. We should let politicians and bureaucrats know that living or working in a historic building is a premium amenity that one chooses, just like one might choose granite counter tops in their kitchen. We shouldn’t expect others to pay for these voluntary choices.

Then, there’s a “HUD Loan Amount,” which is actually a loan guarantee of $29,087,700. U.S. taxpayers are liable for this amount of money should the project not meet its projections.

The subsides to this project have real costs. This development will require services from the city, county, and school district, yet it won’t be contributing its full share of property taxes. So someone else has to pay.

The tax credits represent money that has to be made up by taxpayers across Kansas and the nation. Again, someone else has to pay. Since Kansas applies sales tax to food, even poor people buying groceries will be contributing to the cost of the grants given to this project through state tax credits.

We’ll be told that there’s a “funding gap” that taxpayers must step forward to fill. Why does that gap exist? It’s simple: Markets have decided that this project is not worth what it costs. If it was worth what it’s going to cost, and if the developer is reputable (as we’ve been promised), markets would be willing to fund the project. This happens every day all across the country, even during recessions.

What the city is proposing to do is to take risks with the taxpayers’ money that no one is willing to take with their own. Further, the spending and credit that is diverted from markets to this project wastes capital. There is less capital available for projects that people value, because it is diverted to projects that politicians and bureaucrats value.

The difficulty is that it’s easy to see the new project. The groundbreaking and ribbon cutting ceremonies that commemorate government intervention will be covered by television and newspapers. Politicians and bureaucrats are drawn to these events and will spend taxpayer funds to make sure you’re aware of them.

It’s more difficult to see that the harm that government intervention causes. That harm is dispersed and more difficult to spot. But the harm is real. If it is not, then we need to ask why our governments don’t do more of this type of development.

Driving by a development in a TIF district and noticing a building or people working at jobs does not tell the entire story. Recognizing the existence of a building, or the payment of taxes, or jobs created, is “stage one” thinking, and no more than that.

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. It also requires thinking of the long term effects of a policy, not just the immediate. But over and over again 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.

Wichita’s evaluation of development team should be reconsidered

Dump truck carrying coinsIn an effort to avoid mistakes made in the past and inspire confidence in the process, parties wishing to receive economic development subsidies for projects in downtown Wichita are evaluated on a variety of measures. The evaluation matrix released for a project to be considered next week by the Wichita City Council, however, ought to be recalculated.

City documents describe one of two competing projects as this: “River Vista is proposed by River Vista LLC, a development group comprised of George Laham, Dave Burk, Dave Wells and Bill Warren.”

wichita-evaluation-matrix-2013-08

It’s this ownership team that ought to cause the city concern. Two of the evaluation criteria are “Past project experience with the City of Wichita” and “References, especially from other municipal partners.” This development team was awarded the maximum number of points possible for each (points being a positive measure). Here are a few things that the evaluation committee may not have considered when awarding these points.

Dave Wells: Wells is president of Key Construction. Last year the Wichita Eagle reported on “city-financed downtown parking garages that spiraled well over budget.” Noting the cost overruns, reporter Bill Wilson wrote: “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.” (Wichita city manager proposes eliminating no-bid construction projects.)

Despite these two cost overruns on city projects, Wichita Mayor Carl Brewer wrote in a letter recommending Key Construction on a different matter: “Key is known for their consistent quality construction, budget control and on schedule delivery.” Maybe that’s what the evaluation committee relied on.

Also, two years ago Key Construction proposed — and was awarded by the city council — a no-bid contract for a parking garage. But the city later put the contract to competitive bid. Key, which first bid $6 million, later bid $4.7 million. This no-bid contract awarded to Key was cronyism in the extreme. If the desire of the majority of the city council, including Mayor Carl Brewer, had been realized, Wichita taxpayers would have sent an extra — and unnecessary — $1.3 million to a politically-connected construction company. See Campaign contributions show need for reform in Wichita for an example of how Key Construction has mastered political cronyism.

By the way, the mayor’s relationship with Wells means he should not participate in voting on this matter.

Dave Burk, Dave Wells: These two were original partners in WaterWalk, which has received over $40 million in subsidy, with little to show for results.

Dave Burk: He’s received many millions from many levels of government, but still thinks he doesn’t get enough. This is what we can conclude by his appeal of property taxes in a TIF district. Those taxes, even though they are rerouted back to him for his benefit, were still too high for his taste, and he appealed. The Wichita Eagle reported in the article (Developer appealed taxes on city-owned property): “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.”

rebenstorf-quote-dave-burkA number of Wichita city hall officials were not pleased with Burk’s act. 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, according to her quotations: “‘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 a tax increment financing (TIF) district, the city borrows money to pay for things that directly enrich the developers, in this case Burk and possibly 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. Now he wants more city taxpayer subsidy.

warren-bailout-poses-dilemma

Bill Warren: In 2008 the Old Town Warren Theater was failing and its owners — Bill Warren being one — threatened to close it and leave the city with a huge loss on a TIF district formed for the theater’s benefit. Faced with this threat, the city made a no-interest and low-interest loan to the theater. 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.”

Besides Warren, you may — or may not — be surprised to learn that the theater’s partners included Dave Wells and Dave Burk, the same two men mentioned above. Also, Mayor Brewer’s relationship with Warren means he should not participate in voting on this matter.

With the history of these parties working in public-private partnerships, the Wichita City Council needs to question the matrix delivered by the evaluation committee.

Job creation and the snake oil of tax incentives

Here’s an interesting article by Mark Funkhouser, who recently served as mayor of Kansas City, Missouri. It starts off well, but in the second paragraph derails when the author approves of government intervention to correct what he calls a market failure. But true cases of market failure are exceedingly rare. And if we can justify subsidizing a grocery store in an attempt to revitalize a neighborhood, what can’t we justify subsidizing? Still, a useful article.

Every politician wants to appear to be creating jobs. The problem is that in America today most elected officials think that the way to do this is through the use of tax incentives. Even when they sincerely want to do the right thing, the pressure to give away the public’s money is just too strong: Ribbon-cuttings celebrating business openings secured with public dollars are a staple of the political realm. If you’re not seen doing these regularly, you can be assured that you’ll be called a “jobs killer” in attacks fueled by corporate interests that see you as denying them a place at the public trough.

The truth is, when used in a narrowly focused way to achieve a specific public purpose by correcting a market failure, the use of tax incentives for economic development can be justified — for example, to bring a decent grocery store to a neighborhood where the residents do not have access to healthy food at reasonable prices. In this case, the income base in the area might initially be insufficient to support a store profitably, but once it is built higher-income residents may find the area more desirable and begin to move into the area in such numbers that after a few years the store is sustainable without a government subsidy.

Continue reading at Job Creation and the Snake Oil of Tax Incentives.

Paying taxes, but not quite

Taxes

A complicated economic development mechanism used in Wichita hides the true business welfare transaction.

In today’s Wichita Eagle “serial entrepreneur” and hotelier Jack DeBoer talks about a new apartment project to be built in downtown Wichita, just across the Arkansas River from the WaterWalk development.

In the article, the reporter writes:

The Wichita apartments are expected to be complete by spring 2014, DeBoer said. They will be on 4.4 acres of city-owned land, which Value Place is leasing for $1 a year for 93 years. That agreement was approved by the Wichita City Council last September. DeBoer noted that Value Place is not receiving any other incentives. “We’ll pay full taxes.”

Two things: First, DeBoer gets to use 4.4 acres of land for 93 years for a total cost of $93.00. The city paid $919,695 to acquire the land in 1994 and 1995. The city did, however, require DeBoer to pay the full $93 in advance.

Second, the claim of paying full taxes: This project is located within a tax increment financing (TIF) district. The entire purpose of TIF is to capture the property taxes being paid and divert the funds to the benefit of the payer.

(Strictly, only the increment in property tax is routed back to the payer. Usually almost all the property tax paid falls in the increment. For more about this particular development, see Wichita WaterWalk apartment deal not good for citizens.)

So, when we narrowly construe DeBoer’s claim, he’s correct. But in the larger context, when we follow the money and look at the true economic transactions, he’s wrong. And the Wichita Eagle doesn’t notice, or doesn’t care.

TIF is great for those who get it. But what about the rest of us? Regarding the effect of tax increment financing (TIF) districts on economic development, economists Richard F. Dye and David F. Merriman have studied tax increment financing extensively. Their paper The Effects of Tax Increment Financing on Economic Development bluntly states the overall impact of TIF: “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not.”

Later in the same paper the authors conclude: “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.”

Summarizing, the authors write:

In summary, the empirical evidence suggests that TIF adoption has a real cost for municipal growth rates. Municipalities that elect to adopt TIF stimulate the growth of blighted areas at the expense of the larger town. We doubt that most municipal decision-makers are aware of this tradeoff or that they would willingly sacrifice significant municipal growth to create TIF districts. Our results present an opportunity to ponder the issue of whether, and how much, overall municipal growth should be sacrificed to encourage the development of blighted areas.

In their later article Tax Increment Financing: A Tool for Local Economic Development, Dye and Merriman further explain the results of their research:

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. It’s what elected officials, bureaucrats, and newspaper editorial writers can see and focus on. But 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)

So if we are concerned about overall growth in Wichita, we need to realize that TIF simply shifts development from one place to another. The overall impact, according to uncontroverted research, is negative: less growth, not more.

Derby forms a TIF district

The city of Derby, Kansas has formed a tax increment financing (TIF) district. TIF is a method of diverting the normal flow of property tax revenue so that it benefits private interests rather than the public treasury.

In Kansas, cities form TIF districts. Then, any affected county and school district may vote to veto its formation. They have 30 days to do this. If they take no action, they lose their ability to veto, and the TIF district is created.

The Sedgwick County Commission will consider whether to veto the formation of this TIF district next Wednesday.

Here are documents related to this project:

Derby North Gateway TIF Analysis. Analysis of Derby North Gateway Tax Increment Financing (TIF) District, prepared by Sedgwick County finance department.

Derby North Gateway TIF District Feasibility Study. Redevelopment Project Financial Feasibility Study, Derby North Gateway TIF District, City of Derby, Kansas, March 29, 2013.

New city taxing district dependent upon Menards. Derby Informer news article.

For background on TIF, I’ve prepared a collection of resources at Tax increment financing district (TIF) resources.

Ambassador Hotel Industrial Revenue Bonds

The City of Wichita should not approve a measure that is not needed, that does not conform to the city’s policy (based on relevant information not disclosed to citizens), and which is steeped in cronyism.

This week the Wichita City Council will consider authorizing industrial revenue bonds (IRB) for the Ambassador Hotel project in downtown Wichita.

In most cases, the major benefit of IRBs is exemption from paying property taxes. Since the Ambassador Hotel is located within a tax increment financing (TIF) district, it’s not eligible for property tax abatement. (Because of the TIF, the developers have already achieved the diversion of the majority of their property tax payments away from the public treasury for their own benefit.)

Instead, in this case the benefit of the IRBs, according to city documents, is an estimated $703,017 in sales tax that the hotel won’t have to pay.

The Ambassador Hotel has benefited from many millions of taxpayer subsidy, both direct and indirect. So it’s a good question as to whether the hotel deserves another $703,017 from taxpayers.

But if we follow the city’s economic development policy, the city should not authorize the IRBs. Here’s why.

The Sedgwick County/City of Wichita Economic Development Policy states: “The ratio of public benefits to public costs, each on a present value basis, should not be less than 1.3 to one for both the general and debt service funds for the City of Wichita; for Sedgwick County should not be less than 1.3 overall.”

The policy also states that if the 1.3 to one threshold is not met, the incentive could nonetheless be granted if two of three mitigating factors are found to apply. But there is a limit, according to the policy: “Regardless of mitigating factors, the ratio cannot be less than 1.0:1.”

In September 2011 the city council passed a multi-layer incentive package for Douglas Place, now better known as the Ambassador Hotel and Block One. Here’s what the material accompanying the letter of intent that the council passed on August 9, 2011 held: “As part of the evaluation team process, the WSU Center for Economic Development and Business Research studied the fiscal impact of the Douglas Place project on the City’s General Fund, taking into account the requested incentives and the direct, indirect and induced generation of new tax revenue. The study shows a ratio of benefits to costs for the City’s General Fund of 2.62 to one.

The same 2.62 to one ratio is cited as a positive factor in the material prepared by the city for Tuesday’s meeting.

So far, so good. 2.62 is greater than the 1.3 that city policy requires. But the policy applies to both the general fund and the debt service fund. So what is the impact to the debt service fund? Here’s the complete story from the WSU CEDBR report (the report may be viewed at Wichita State University Center for Economic Development and Business Research Study of Ambassador Hotel):

                                   Cost-benefit ratio
City Fiscal Impacts General Fund         2.63
City Fiscal Impacts Debt Service Fund    0.83
City Fiscal Impacts                      0.90

We can see that the impact on the debt service fund is negative, and the impact in total is negative. (A cost-benefit ratio of less than one is “negative.”)

Furthermore, the cost of the Ambassador Hotel subsidy program to the general fund is $290,895, while the cost to the debt service fund is $7,077,831 — a cost factor 23 times as large. That’s why even though the general fund impact is positive, the negative impact of the much larger debt service fund cost causes the overall impact to be unfavorable.

The city didn’t make this negative information available to the public in 2011, and it isn’t making it available now. It was made public only after I requested the report from WSU CEDBR. It is not known whether council members were aware of this information when they voted in 2011.

So the matter before the council this week doesn’t meet the city’s economic development policy standards. It’s not even close.

There are, however, other factors that may allow the city to grant an incentive: “In addition to the above provisions, the City Council and/or County Commission may consider the following information when deciding whether to approve an incentive.” A list of 12 factors follows, some so open-ended that the city can find a way to approve almost any incentive it wants.

A note: The policy cited above was passed in August 2012, after the Ambassador Hotel incentives package passed. But the 1.3 to one threshold was de facto policy before then, and whether a proposed incentive package met that standard was often a concern for council members, according to meeting minutes.

Timing and campaign contributions

Citizens might wonder why industrial revenue bonds are being issued for a hotel that’s complete and has been operating for over three months. The truly cynical might wonder why this matter is being handled just two weeks after the city’s general election on April 2, in which four city council positions were on the ballot. Would citizens disagree with giving a hotel $703,017 in sales tax forgiveness? Would that have an effect on the election?

Campaign contributions received by James Clendinin from parties associated with Key Construction. Clendenin will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors.Campaign contributions received by James Clendinin from parties associated with Key Construction. Clendenin will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors. (Click for larger view.)

Combine this timing with the practice of part of the hotel’s ownership team of engaging in cronyism at the highest level. Dave Burk and the principals and executives of Key Construction have a history of making campaign contributions to almost all city council candidates. Then the council rewards them with overpriced no-bid contracts, sweetheart lease deals, tax abatements, rebates of taxes their customers pay, and other benefits. The largesse dished out for the Ambassador Hotel is detailed here. This hotel, however, was not the first — or the last time — these parties have benefited from council action.

Campaign contributions received by Lavonta Williams from parties associated with Key Construction. Williams will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors.Campaign contributions received by Lavonta Williams from parties associated with Key Construction. Williams will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors. (Click for larger view.)

Campaign finance reports filed by two incumbent candidates illustrate the lengths to which Key Construction seeks to influence council members. Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) and Wichita City Council Member Lavonta Williams (district 1, northeast Wichita) received a total of $7,000 from Key Construction affiliates in 2012. Williams received $4,000, and $3,000 went to Clendenin. For Williams, these were the only contributions she received in 2012.

A table of campaign contributions received by city council members and the mayor from those associated with the Ambassador Hotel is available here.

Wichita mayor Carl Brewer with major campaign donor Dave Wells of Key Construction. Brewer will vote tomorrow whether to grant a company Wells is part owner of sales tax forgiveness worth $703,017.

This environment calls out for campaign finance reform, in particular laws that would prohibit what appears to be the practice of pay-to-play at Wichita City Hall.

There was a time when newspapers crusaded against this type of governance. Unfortunately for Wichitans, the Wichita Eagle doesn’t report very often on this issue, and the editorial board is almost totally silent. Television and radio news outlets don’t cover this type of issue. It’s left to someone else to speak out.

Wichitans have choices; perhaps not information

The Wichita Eagle publishes a voter guide before each election. While this is a useful civic service, readers of the newspaper might wonder what is the point of allowing candidates to make statements and claims without being held accountable.

Here are two examples of candidates responding to the question “Assess the city’s success in downtown revitalization so far. How do you see that role evolving in the future?”

Council Member Lavonta Williams (district 1, northeast Wichita) responded as follows:

The trend in downtown redevelopment is showing a definite payoff in private investment exceeding $250 million since 2009. People are moving downtown and more private developers are starting projects in the area all of the time. I think that the city will still need to play a role in assuring that infrastructure, especially public green spaces and strategically placed parking, is in place so that private development can be attracted.

Council Member Janet Miller (district 6, north central Wichita) answered this way:

Wichita adopted its Downtown Master Plan in 2010 following an 18-month process involving input from several thousand Wichitans. Since the plan’s adoption, there has been a growing confidence in downtown development, which has resulted in more than $150 million in private investment. The City’s role will be to continue to foster private investment supported by public infrastructure improvements where needed.

Both incumbent candidates claim a large investment in downtown Wichita. Although they didn’t make this claim in these answers, it’s usually claimed that the taxpayer investment in downtown pays off in the form of increased tax revenues. This is the cost-benefit analysis that the city relies on and uses to justify taxpayer investment in projects.

 Wichita Downtown Self-supporting Municipal Improvement District SSMID Assessed Valuation 2013-02 b

But evidence of a payoff for the taxpayer is hard to find. At the same time hundreds of millions in investment is claimed, the assessed value of property in downtown Wichita is declining.

We’re left to wonder whether readers of the Wichita Eagle are aware of the apparent contradiction between candidates’ claims and evidence from the real world.

On another issue, the influence of campaign contributions, readers of the Eagle will probably also be uninformed about candidates’ actions. In response to the question “How would you handle a vote on an issue involving a campaign contributor?” Council Member James Clendenin (district 3, southeast and south Wichita) supplied this answer:

No different than any other vote. I will vote for the best interest of the citizens Wichita and District III. I answer directly to the voters.

Williams answered the same question this way:

I would continue to handle it the way I always have. The city has good campaign finance laws that make sure no one individual or group can buy a council person’s vote. The law limits the contributions to a low enough amount that no one contribution can make or break a campaign. I treat each donation whether large or small the same and thank the community for their faith and support in what I do.

The candidates’ lofty claims of independence from campaign contributions are difficult to believe. There is simply too much money given, and the candidates’ actions are too suspect.

As an example, in 2012, these two candidates received campaign contributions from two sources: A group of principals and executives of Key Construction, and another group associated with theater owner Bill Warren. Except for $1.57 in unitemized contributions to Clendenin, these two groups accounted for all contributions received by these two incumbents.

Those associated with Key Construction gave a total of $7,000. Williams received $4,000, and $3,000 went to Clendenin.

Those associated with Warren gave $5,000, all to Clendenin.

The problem is that both of these groups have benefited from the cronyism of the Wichita City Council, in particular members Williams and Clendenin.

Here’s one example, perhaps the worst. 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.

Both Williams and Clendenin voted for this no-bid contract that was contrary to the interests of taxpayers. They didn’t vote for this reluctantly. They embraced it.

Last summer Williams and Clendenin, along with the rest of the council, 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.

Judges shouldn’t preside over decisions that hugely enrich their significant campaign contributors. No matter what the merits of the case, this is bad government.

Williams was also the beneficiary of campaign contributions immediately before a Methodist minister asked the city to approve over two million dollars in tax increment financing. 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.

By the way, this project, under Harding’s management, foundered until the city council offered a bailout. By then Harding had found new partners. No surprise these partners included Key Construction, Williams’ sole source of campaign funds in 2012.

Wichitans who rely on the Wichita Eagle for advice on voting won’t likely be aware of these facts regarding these candidates.

Developer welfare expanded in Kansas

Money Grabber

This week the Kansas House of Representatives considered a bill that would expand the application of tax increment financing (TIF) and community improvement district taxes. The bill, HB 2086, is not a major expansion, but is still harmful.

On Monday the bill failed to pass, with 61 members voting in favor, and 60 against. (63 votes are needed to pass a bill.)

On the following day, Rep. Scott Schwab made a motion to reconsider. If agreed to, Schwab’s motion would force another vote on the passage of the bill. The motion passed, and when the vote on the bill was tallied, it had passed with 81 votes.

Democrats who changed their votes from No to Yes are Barbara Ballard, Brandon Whipple, Ed Trimmer, Jerry Henry, Julie Menghini, Nancy Lusk, Patricia Sloop, Paul Davis, Stan Frownfelter, Tom Burroughs and Valdenia Winn.

Republicans who changed their votes from No to Yes are Dennis Hedke, James Todd, Kelly Meigs, Kevin Jones, Marty Read, Ramon Gonzalez, Scott Schwab, and Vern Swanson.

One Republican, Marc Rhoades, changed his vote from Yes to No.

The original coalition of votes that defeated the bill on Monday was a mix of free-market Republicans and Democrats. The free-market members vote against this bill because it is contrary to the principals of capitalism. Many Democrats vote against bills like this because they see it as welfare for greedy developers or other business interests. An example of the latter is Rep. Ed Trimmer, who on the Kansas Economic Freedom Index for last year scored very near the bottom in terms of voting for economic freedom.

But somehow, he and the other Democrats listed above were persuaded to change their votes.

(Click here to open spreadsheet in new window.)

Carl Brewer: The state of Wichita, 2013

Wichita Mayor Carl Brewer, State of the City Address, January 29, 2013

Much like President Barack Obama in his recent inaugural address, Wichita Mayor Carl Brewer displayed his collectivist instincts in his “State of the City” address for 2013. His speech, as prepared, may be read here.

Opening, the mayor said “Wichita has overcome great challenges in the past and will overcome these as well, but we’ll need to work together.”

Near the close, the mayor said “THE TIME FOR ACTION IS NOW! We have reached a point where we MUST come together as a community, and create a plan that defines our priorities and the City we are to become.” And then: “For all of our differences, I have never doubted this community’s ability to come together and protect what matters most.” (The capitalization is in the mayor’s prepared text.)

But what’s really important to Wichita is economic development. Regarding that, Brewer said this:

As we struggle to compete for new businesses and new jobs, especially in light of job losses in aviation, we must face the reality that we are competing with other cities that offer economic incentives for business development and expansion. If we want to be IN the game, we need to PLAY the game, but we have no dedicated funding source for economic development. If we’re serious about finding new jobs for our people — and I am — we must change this scenario as soon as possible. Where will those incentive dollars come from? (Capitalization, again, is from the original.)

The idea of a dedicated funding source for economic development is something that many in Wichita would support. Many would oppose it, too. But instead of just lobbing rhetorical questions (Where will those incentive dollars come from?), the mayor should give us some answers. Or, at least make a specific proposal. Does the mayor recommend a sales tax increase? Or allocating specific levels of property tax to economic development? (The city is doing this on a temporary basis.) Or asking the state legislature to fund Wichita’s economic development, as we insist the legislature fund our airline subsidy program?

Whatever it is, Mayor Brewer, give us some specific ideas as to how you want to raise this money, and how you would spend it.

It’s that spending, I think, that people in Wichita have concern over. The cumulative record of Brewer, the city council, and city bureaucratic staff hasn’t inspired trust and confidence. Giving the city additional dollars to spend on economic development is not a wise investment.

For example, the mayor says that subsidizing downtown development is good economic development strategy. But we see the mayor and nearly all council members voting to give an overpriced no-bid contract to their significant campaign contributors. This happened despite the company’s large cost overruns on previous no-bid contracts awarded by the city. Is that good economic development practice?

We see the city council sitting in a quasi-judicial role, adjudicating the award of an airport construction contract when one of the parties is a significant campaign contributor. In fact, Key Construction — the company that prevailed in that decision — through its principals and executives, was the sole source of campaign funds raised by Lavonta Williams (district 1, northeast Wichita) in 2012 as she prepared to run for reelection this spring.

Key’s executives also contributed heavily to James Clendenin (district 3, southeast and south Wichita) last year. He’s running this spring, too.

At the time this airport contract was being handled, Council Member Jeff Longwell (district 5, west and northwest Wichita) was campaigning for the Sedgwick County Commission. Campaign finance reports revealed contributions from parties associated with Walbridge, a Michigan construction company. 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 airport terminal, and that Longwell would be voting on that contract, provide a clue?

Or: A movie theater owner and business partners contribute to the mayor’s (and other) campaigns. Mayor and council vote to give a no-interest and low-interest loan and tax breaks to theater owner and his partners. Mayor goes into barbeque sauce business. Mayor’s barbeque sauce is now sold at movie theater.

Doesn’t Carl Brewer see anything wrong with this? Don’t his advisors tell him that this creates the appearance of impropriety? Does the mayor consider whether these actions make a positive impression on those who might want to invest in Wichita?

We see the city awarding economic development incentives that were not necessary for the project to proceed. It took a special election to teach the mayor and council that lesson. By the way, that unneeded and rejected incentive was awarded to the significant campaign contributors of Mayor Brewer and most council members.

We see the city taking credit for building up the tax base, yet giving away tax revenue in the form of property tax abatements, IRBs, tax increment financing, and STAR bonds.

The bureaucratic missteps: The Southfork TIF district is just the latest example.

The lack of respect for citizens’ right to know how taxpayer funds are spent is another troubling aspect of Brewer’s tenure as mayor. None of the words “accountability,” “transparency,” or “open government” were mentioned in the mayor’s address this year, as they have been in the past. No sense in calling attention to an area where the city has failed, I suppose.

All this is done in the name of economic development and jobs. But Wichita is underperforming Kansas and the nation in these areas. Under Brewer’s leadership, however, we are overachieving in the advancement of cronyism and its ills.

The record indicates that our officeholders, and those who advise them, are not worthy of our trust, and certainly not more taxes for economic development.

After last year’s State of the City speech, I noted “Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles of freedom and liberty ‘simplistic.’ Instead, his government prefers crony capitalism and corporate welfare.”

I also wrote: “Relying on economic freedom, free markets, and limited government for jobs and prosperity means trusting in free people, the energy of decentralized innovation, and spontaneous order. A government plan for economic development is the opposite of these principles.”

This year, the outlook for economic freedom and limited government in Wichita is gloomier than ever before. The door for those who wish to profit through cronyism is wide open. We’ll have to hope that, somehow, Wichita can learn to thrive under this regime.

Bowllagio property purchases seem overpriced

As part of a planned real estate development, taxpayers may be asked to pay property owners much more than the appraised values for the parcels.

According to documents obtained from the Wichita city manager’s office, developers of Bowllagio have budgeted to pay a collective $1,110,300 over the property’s appraised values. This is 63 percent over the appraised values for the 14 parcels.

The source of funds for these purchases is a proposed tax increment financing (TIF) district created for the benefit of Maize 54, LLC, the developer of Bowllagio. The Wichita City Council approved the formation of the district on November 20. Now the Goddard School District and Sedgwick County Commission may veto the formation of the district. The approval of these two bodies is not required; but they have the right to cancel the formation of the district.

A meeting last week with Goddard school officials resulted in learning that it seems unlikely that the school district will take up the matter. The item is on the agenda of the county commission’s Wednesday meeting.

The Sedgwick County Appraiser’s Office explains appraised values: “The value of property is determined by market transactions. The Appraiser’s office has the responsibility to study those transactions and appraise property accordingly. The Appraiser’s office determines market value through the use of generally accepted appraisal methods.”

If the appraiser’s valuations are close to the market value of the properties — and we have reason to believe they are — we have to ask why did the Wichita city council approve spending so much taxpayer money on these properties?

And, will the Sedgwick County Commission give its approval to this waste of taxpayer money?

Proposed home purchases for Maize 54 / Bowllagio development