Tag Archives: Wichita city government

How TIF routes taxpayer-funded benefits to Wichita’s political players

From January 2012, how tax increment financing routes benefits to politically-connected firms.

It is now confirmed: In Wichita, tax increment financing (TIF) leads to taxpayer-funded waste that benefits those with political connections at city hall.

The latest evidence we have is the construction of a downtown parking garage that benefits Douglas Place, especially the Ambassador Hotel, a renovation of a historic building now underway.

The flow of tax dollars Wichita city leaders had planned for Douglas Place called for taxpayer funds to be routed to a politically-connected construction firm. And unlike the real world, where developers have an incentive to build economically, the city created incentives for Douglas Place developers to spend lavishly in a parking garage, at no cost to themselves. In fact, the wasteful spending would result in profit for them.

The original plan for Douglas Place as specified in a letter of intent that the city council voted to support, called for a parking garage and urban park to cost $6,800,000. Details provided at the August 9th meeting of the Wichita City Council gave the cost for the garage alone as $6,000,000. The garage would be paid for by capital improvement program (CIP) funds and tax increment financing (TIF). The CIP is Wichita’s long-term plan for building public infrastructure. TIF is different, as we’ll see in a moment.

At the August 9th meeting it was also revealed that Key Construction of Wichita would be the contractor for the garage. The city’s plan was that Key Construction would not have to bid for the contract, even though the garage is being paid for with taxpayer funds. Council Member Michael O’Donnell (district 4, south and southwest Wichita) expressed concern about the no-bid contract. As a result, the contract was put out for competitive bid.

Now a winning bid has been determined, according to sources in city hall, and the amount is nearly $1.3 million less than the council was willing to spend on the garage. This is money that otherwise would have gone into the pockets of Key Construction. Because of the way the garage is being paid for, that money would not have been a cost to Douglas Place’s developers. Instead, it would have been a giant ripoff of Wichita taxpayers. This scheme was approved by Mayor Carl Brewer and all city council members except O’Donnell.

Even worse, the Douglas Place developers have no incentive to economize on the cost of the garage. In fact, they have incentives to make it cost even more.

Two paths for developer taxes

Recall that the garage is being paid for through two means. One is CIP, which is a cost to Wichita taxpayers. It doesn’t cost the Douglas Place developers anything except for their small quotal share of Wichita’s overall tax burden. In exchange for that, they get part of a parking garage paid for.

Flows of funds in regular and TIF development.
Flows of funds in regular and TIF development.
But the tax increment financing, or TIF, is different. Under TIF, the increased property taxes that Douglas Place will pay as the project is completed won’t go to fund the general operations of government. Instead, these taxes will go to pay back bonds that the city will issue to pay for part of the garage — a garage that benefits Douglas Place, and one that would not be built but for the Douglas Place plans.

Under TIF, the more the parking garage costs, the more Douglas Place property taxes are funneled back to it — taxes, remember, it has to pay anyway. (Since Douglas Place won’t own the garage, it doesn’t have to pay taxes on the value of the garage, so it’s not concerned about the taxable value of the garage increasing its tax bill.)

Most people and businesses have their property taxes go towards paying for public services like police protection, firemen, and schools. But TIF allows these property taxes to be used for a developer’s exclusive benefit. That leads to distortions.

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

First, the more the garage costs, the more the hotel benefits from a fancier and nicer garage for its guests to park in. Remember, since the garage is paid for by property taxes on the hotel — taxes Douglas Place must pay in any case — there’s an incentive for the hotel to see these taxes used for its own benefit rather than used to pay for firemen, police officers, and schools.

Second, consider Key Construction, the planned builder of the garage under a no-bid contract. The more expensive the garage, the higher the profit for Key.

Now add in the fact that one of the partners in the Douglas Place project is a business entity known as Summit Holdings LLC, which is composed of David Wells, Kenneth Wells, Richard McCafferty, John Walker Jr., and Larry Gourley. All of these people are either owners of Key Construction or its executives. The more the garage costs, the higher the profit for these people. Remember, they’re not paying for the garage. City taxpayers are.

The sum of all this is a mechanism to funnel taxpayer funds, via tax increment financing, to Key Construction. The more the garage costs, the better for Douglas Place and Key Construction — and the worse for Wichita taxpayers.

Fueled by campaign contributions?

It’s no wonder Key Construction principals contributed $16,500 to Wichita Mayor Carl Brewer and five city council members during their most recent campaigns. Council Member Jeff Longwell (district 5, west and northwest Wichita) alone received $4,000 of that sum, and he also accepted another $2,000 from managing member David Burk and his wife.

This scheme — of which few people must be aware as it has not been reported anywhere but here — is a reason why Wichita and Kansas need pay-to-play laws. These laws impose restrictions on the activities of elected officials and the awarding of contracts.

An example is a charter provision of the city of Santa Ana, in Orange County, California, which states: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”

This project also shows why complicated financing schemes like tax increment financing need to be eliminated. Government intervention schemes like this turn the usual economic incentives upside down, and at taxpayer expense.

Sam Williams, CPA?

Sam Williams, a candidate for Wichita mayor, is not entitled to use the title “CPA,” according to Kansas law.

“I am a Certified Public Accountant.”

“– Sam Williams, CPA”

“CPA Sam Williams”

“Being a CPA, Sam Williams …”

“Bert Denny, CPA — Treasurer”

Sam Williams campaign mailer.
Sam Williams campaign mailer.
These are some of the statements you’ll find on campaign and biographical material for Wichita mayoral candidate Sam Williams. But he isn’t licensed as a CPA, and Kansas law is clear on who can use the title “CPA.”

Kansas law states: “It is unlawful for any person, except the holder of a valid certificate or practice privilege pursuant to K.S.A. 1-322, and amendments thereto, to use or assume the title ‘certified public accountant’ or to use the abbreviation CPA …”

When asked if he was a licensed CPA in Kansas, Williams said that he was certified, but doesn’t have a license to practice. Asked about the statute that regulates unlawful use of the title “CPA,” Williams said “I never heard that before.”

It’s understandable that Williams does not have a CPA license in Kansas. He had such a license in Utah, expiring in 1990. In Wichita he worked as an executive in the advertising industry. He was not offering accounting services to the public.

Sam Williams campaign mailer.
Sam Williams campaign mailer.

As candidate for mayor of Wichita, the title “CPA” is front and center in Williams’ campaign. Advertising pieces make frequent use of the title, promoting business-related qualifications like knowing how to balance a budget and minimizing taxes.

We might dismiss this use of the CPA title as the type of resume-burnishing that is routine for candidates, and perhaps for anyone looking for a job. But Kansas has a law.

It’s not an obscure law, as this issue has been in the news. Last year United States Representative Lynn Jenkins of Topeka was granted special treatment by the Kansas Board of Accountancy, allowing her to continue to use the title “CPA” even though her license had expired. This was widely reported, and the Wichita Eagle editorialized on this issue, quoting a Nebraska accounting board official as saying “She’s misleading the public.”

Sam Williams knew of the Jenkins case. He mentioned her by name when asked about using the “CPA” title. He knew of the controversy.

Of note, Williams’ treasurer is a CPA.

The Kansas statute

A Kansas law, K.S.A. 1-316 (c), states “It is unlawful for any person, except the holder of a valid certificate or practice privilege pursuant to K.S.A. 1-322, and amendments thereto, to use or assume the title ‘certified public accountant’ or to use the abbreviation CPA or any other title, designation, words, letters, abbreviation, sign, card or device likely to be confused with ‘certified public accountant.'”

A violation of this law is a misdemeanor, carrying a fine of up to $5,000 and up to one year imprisonment, or both.

Inquiry to the Kansas Board of Accountancy finds that Sam Williams has never had a CPA certificate in Kansas. His certificate from Utah expired in 1990, about the time Williams moved from Utah to Kansas.

While the statue seems clear, additional information from the Kansas Board of Accountancy is less than clear. In a document titled Who may use the CPA title in Kansas?, holds this advice; “For instance — if the CPA is a controller, CFO or an employee of a company that is not a CPA firm, whose responsibilities are to his/her employer only, then the use of CPA is allowable if used with the person’s name, the name of the company, and the person’s position with the company.”

This seems to allow someone like Williams — who was an executive with an advertising agency until retiring last year — some latitude in the use of the CPA title.

But the same document holds this: “What is also not allowed without a valid permit to practice, is advertising, phone book listing, letterhead, signature as a CPA on documents provided to the public (this includes friends and family), or third parties relying on the information provided.”

Wichita officials complain of lack of cash for incentives

Wichita has stepped up with cash for incentives when needed, contrary to complaints of economic development officials.

With reports of lackluster results in creating and retaining jobs in Wichita, economic development officials in Wichita complain of a lack of cash incentives.

But recent history shows that when cash is needed, local governments have responded positively.

When Hawker Beechcraft threatened to leave Wichita for Baton Rouge, Wichita and Sedgwick County contributed $2.5 million each for an incentive. (Never mind that the threat to move was not real.)

Not long after that, the city and county contributed $1 million each for an incentive for Bombardier Learjet.

So there is recent history that shows when officials feel that spending on cash incentives is necessary, the city and county find the money. It’s difficult to imagine that if GWEDC officials had come to the city or county with a need for cash — especially if a deal was truly hinging on a cash contribution — that the council and commission would not find the money somewhere.

Job creation in context

For 2014, GWEDC claims credit for creating or retaining 424 jobs.

The Bureau of Labor Statistics tells us that for 2014, the labor force for local geographies was:

Wichita: 185,179
Sedgwick County: 242,460
Metro Wichita: 300,911

For each area, 424 jobs amounts to this percent of the labor force:

Wichita: 0.23 percent
Sedgwick County: 0.17 percent
Metro Wichita: 0.14 percent

Sales tax not about cash, they said

"Yes Wichita" campaign material
“Yes Wichita” campaign material
While economic development officials complain of lacking a deal closing fund, during last year’s sales tax campaign we were told that Wichita would not be competing by giving out cash. Material on the “Yes Wichita” campaign website, under the heading “Why is this plan different?” reads “It’s not about cash for jobs — it’s about investing in ourselves.”

Later on the same page: “We’ll let other cities compete with cash and instead we’ll invest in our people and infrastructure.”

The lights are off, and then they’re off

A problem with wasteful spending in downtown Wichita is gradually curing itself, creating another problem in its place.

Downtown Wichita street lights 2015-02-13 11.29.19 HDRA bench at the heart of downtown Wichita should be illuminated at night by four lights. Only one light works, probably because the others have been left switched on 24 hours per day.

So wasteful spending on street lights during the day is being replaced by unlit streets at night.

What message does wasteful spending on street lights during the day send?

it's difficult to show three nonfunctioning lights next to one that works, I'm afraid.
it’s difficult to show three nonfunctioning lights next to one that works, I’m afraid.
Perhaps more importantly, what impression does nonfunctioning lights at night create — three of four at this bench? And at one of our major downtown intersections? Across the street from our nice boutique hotel?

Is this the “walkable” downtown we’re trying to create?

I suppose that Wichita city leaders want to be seen taking care of our larger problems, and of those, we have a few. But this long-running problem with lights at this downtown street side bench needs to be taken care of soon. Visitors to our town may not be aware of the lofty and sweeping rhetoric of our mayor, bureaucrats, and civic leaders.

But they do notice the downtown street lights.

Republican candidates for Wichita mayor

Voice for Liberty Radio 150x150On February 19, 2015 the Sedgwick County Republican Party held a forum for Republican candidates for Wichita mayor. Attending, in the order of their appearance, were Sean Hatfield, Dan Heflin, Jeff Longwell, Sam Williams, and Jennifer Winn. Todd Johnson moderated. Jennifer Baysinger compiled questions from the audience and asked them of candidates. Sue Colaluca was the timing judge.

WichitaLiberty.TV: Mayor Carl Brewer’s State of the City address, and the Libertarian Mind

In this episode of WichitaLiberty.TV: We’ll take a look at a few things Wichita Mayor Carl Brewer told the city in his recent State of the City Address. Then a look at topics from a new book titled “The Libertarian Mind: A Manifesto for Freedom.” View below, or click here to view at YouTube. Episode 76, broadcast February 22, 2015.

WichitaLiberty.TV: Transportation issues in Wichita

In this excerpt from WichitaLiberty.TV: Wichita’s legislative agenda concerning transportation issues is unsound. For airfares, it relies on a questionable presentation, and for passenger rail, it advocates for a system that is costly for taxpayers. View below, or click here to view at YouTube. Originally broadcast December 7, 2014.

For more on this issue, see: City of Wichita State Legislative Agenda: Airfares and City of Wichita State Legislative Agenda: Passenger rail

Lavonta Williams on the Wichita City Council

Here’s a timeline of events from the tenure of Lavonta Williams on the Wichita City Council. These are events related to cronyism and disrepect for the people of Wichita — except for her campaign contributors. For them, she voted for no-bid contracts and other taxpayer-funded largess. The behavior of Williams is one of the reasons that Wichita needs pay-to-play laws that prevent council members from voting to enrich their significant campaign contributors.

Williams timeline

Jeff Longwell on the Wichita City Council

Here’s a timeline of events from the tenure of Jeff Longwell on the Wichita City Council. These are events related to cronyism and disrepect for the people of Wichita — except for his campaign contributors. For them, he voted for no-bid contracts and other taxpayer-funded largess. The behavior of Longwell is one of the reasons that Wichita needs pay-to-play laws that prevent council members from voting to enrich their significant campaign contributors.

Longwell timeline

Industrial revenue bonds in Kansas

Industrial Revenue Bonds are a confusing economic development program. We see evidence that citizens are concerned that the city or county is in the business of lending money to companies, when that is not the case. You see this misunderstanding revealed in comments left to newspaper articles reporting the issuance of IRBs, where comment writers complain that the city shouldn’t be in the business of lending companies money.

IRBs are not a loan by government
A recent Wichita city council agenda packet regarding an IRB issue explains that the city is not lending the applicant money. In fact, no one is lending, in the net: “Spirit AeroSystems, Inc. intends to purchase the bonds itself, through direct placement, and the bonds will not be reoffered for sale to the public.” If a company wants to lend itself money, this is a private transaction that should be of no public interest or concern.

Industrial Revenue Bonds in Kansas. Click for larger version.
Industrial Revenue Bonds in Kansas. Click for larger version.
In 2010 when movie theater owner Bill Warren and partners sought IRBs, city documents held this: “American Luxury Cinemas, Inc. proposes to privately place the $16,000,000 taxable industrial revenue bond with Intrust Bank, with whom there is a long-standing banking relationship.” Again, if a bank wants to lend someone money, this a private transaction that should be of no public interest or concern.

The reason for IRBs
The reason why IRB transactions take place is simple: tax avoidance. That’s the real story of Industrial Revenue Bonds: Companies escape paying the property and sales taxes that you and I — as well as most business firms — must pay.

It’s not uncommon for the issuing company to buy the bonds, as in the case of Spirit. So why issue the bonds? The agenda packet has the answer: “The bond financed property will be eligible for sales tax exemption and property tax exemption for a term of ten years, subject to fulfillment of the conditions of the City’s public incentives policy.”

City documents didn’t give the amount of tax Spirit will avoid paying, so we’re left to surmise. Bonds could be issued up to $59.5 million. Taxable business property of that value would generate an annual tax bill of around $1.8 million per year, and Spirit would not pay that for up to ten years. For sales taxes, if all the purchased property was subject to sales tax, that one-time tax exemption would be $4.3 million. These are the upper bounds of the tax savings Spirit Aerosystems may receive. Its actual savings will probably be lower, but still substantial.

In the case of the Warren theater, the IRBs provided sales and property tax exemptions, although the property tax exemption was partially offset by a payment in lieu of taxes agreement.

IRBs are a confusing economic development program. It sounds like a loan from the city or state, but it’s not. The purpose is to convey tax avoidance.

Here’s language from the Wichita ordinance that was passed to implement the Spirit bonds: “The Bonds, together with the interest thereon, are not general obligations of the City, but are special obligations payable (except to the extent paid out of moneys attributable to the proceeds derived from the sale of the Bonds or to the income from the temporary investment thereof) solely from the lease payments under the Lease, and the Bond Fund and other moneys held by the Trustee, as provided in the Indenture. Neither the credit nor the taxing power of the State of Kansas or of any political subdivision of such State is pledged to the payment of the principal of the Bonds and premium, if any, and interest thereon or other costs incident thereto.”

So no governmental body has any obligation to pay the bondholders in case of default. But this language hints at another complicating factor of IRBs: The city actually owns the property purchased with the bond proceeds, and leases it to Spirit. Here’s the preamble of the ordinance: “An ordinance approving and authorizing the execution of a lease agreement between Spirit Aerosystems, Inc. and the City of Wichita, Kansas.”

Other language in the ordinance is “WHEREAS, the Company will acquire a leasehold interest in the Project from the City pursuant to said Lease Agreement.” There’s other language detailing the lease.

We create this “imaginary” lease agreement — and that’s what it is, as it doesn’t have the same purpose and economic meaning as most leases — for what purpose? Just so that certain companies can avoid paying taxes.

The City of Wichita does have another program that allows it to exempt these taxes under some circumstances without having to issue bonds. In this case the goal of the program is laid clear: tax avoidance.

The actual economic transaction
IRBs are a confusing program that obfuscates the actual economic transaction. That’s not good public policy, whether or not you agree with the concept of selective tax abatements as economic development.

Similarly, a principle of good tax policy is that those in similar situations should face the same laws. IRBs are contrary to this.

Also, IRBs are generally available only to large companies. There is massive red tape to overcome, as well as fees, such as an annual fee of $2,500 to the city.

Often when IRBs are presented to city councils for approval, there is explanation of what the bond proceeds will be used for. This is curious. It is as though city council members are wise enough to ascertain whether the plans a company has are economically feasible and desirable, and that the council would not grant approval for the IRBS if not.

While we can understand that citizens — with their busy lives — may not be informed or concerned about the complex workings of IRBs, we should expect more from our elected (and paid) officials. But we find often they are not informed.

As an example, in 2004 the Wichita Eagle reported: “In July, the council approved industrial revenue bond financing and a $1.7 million property tax abatement for Genesis Health Clubs. Council members later said they didn’t realize they had also approved a sales-tax break.” (Kolb goal : Full facts in future city deals, September 26, 2004)

Here we see Wichita City Council members not aware of the basic mechanism of a major city program that is frequently used. This is in spite of an informative city web page devoted to IRBs which prominently states: “Generally, property and services acquired with the proceeds of IRBs are eligible for sales tax exemption.”

WichitaLiberty.TV: That piano, the effect of school choice on school districts, and making Wichita inviting.

In this episode of WichitaLiberty.TV: The purchase of a piano by a Kansas school district is a teachable moment. Then, how do school choice programs affect budgets and performance of school districts? Finally, making Wichita an inclusive and attractive community. View below, or click here to view at YouTube. Episode 75, broadcast February 15, 2015.

Making Wichita an inclusive and attractive community

There are things both easy and difficult Wichita could do to make the city inclusive and welcoming of all, especially the young and diverse.

Wichita Chamber of Commerce 2013-07-09 004In its questionnaire for candidates for Wichita mayor and city council, the Wichita Metro Chamber of Commerce asked this: “How will you work to make Wichita an inclusive community where all will feel welcome, particularly the young and diverse talent we need to help attract more young and diverse talent?”

There are a few very easy things Wichita could do to appeal to millennials — I think that is one of the groups the Chamber addresses in its questions — and diverse people.

Support the decriminalization of marijuana. The city council reacted to a recent petition to reduce the penalty for carrying small amounts of marijuana by placing the measure on the April general election ballot. Another option the city had was to adopt the ordinance as submitted. That would have sent a positive message to millennials, but the council did not do that.

Ask the state to positively end marriage discrimination. The city has a legislative agenda it prepares for state legislators each year, but this matter was not mentioned.

wichita-taxi regulationsWichita should reform its taxicab regulations so that ride-sharing businesses like Uber are operating fully within the law, instead of outside the law as Uber is currently operating. Uber is an example of the type of innovation that city officials and civic leaders say we need, and millennials love Uber. But: Uber has been operating in Wichita since August. Uber has model legislation that could be adopted quickly. Yet, six months later the city has not acted. This delay does not send a message that Wichita welcomes innovation. Instead, it sends a message that the regulatory regime in Wichita is not able to adapt to change.

Pledge to resist the growth of the surveillance state. No street surveillance cameras in Wichita. No mass license plate scanning by police.

To the extent there are problems with the Wichita Police Department, resolve them so that citizens feel safe and minorities feel welcome and not threatened. A citizen oversight panel that has real authority would be a good step. Proceed quickly with implementation of police body cameras. End the special entertainment districts, which many feel are targeted at minority populations.

Here’s a bad idea, but an indication what passes for innovation at the Wichita Chamber: Pay down the student loan debt of young people. This is a bad idea on several levels. First, it rewards those who borrowed to pay for college. Those who saved, worked, or went to inexpensive colleges are not eligible this benefit. Further, if we award this incentive, those who receive it might wonder if that someday they will be taxed to provide this benefit to younger people. After all, the corollary of “Come to Wichita and we’ll pay down your student loan” is “Stay in Wichita, and you’re going to be paying down someone else’s student loan.” If the Chamber wished to raise funds voluntarily to provide such a program, that would be fine. But no tax funds should be used for anything like this.

What Wichita really needs to do

Most of the above are relatively easy to accomplish. Here’s something that is very important, something that should be easy to do, but goes against the grain of elected officials, bureaucrats, and civic leaders like those who run the Wichita Metro Chamber of Commerce. That is: Promote free markets instead of government management of the economy.

A Reason-Rupe survey of 2,000 Americans between the ages of 18 and 29 found that millennials strongly prefer free markets over a government-managed economy. When asked to choose the better system, 64 percent of millennials choose the free market over an economy managed by the government (32 percent).

Also, the survey found that millennials are distrustful, believing that government acts in favor of special interest groups and that government abuses its powers: “A Reason-Rupe survey of 2,000 Americans between the ages of 18 and 29 finds 66 percent of millennials believe government is inefficient and wasteful — a substantial increase since 2009, when just 42 percent of millennials said government was inefficient and wasteful. Nearly two-thirds of millennials, 63 percent, think government regulators favor special interests, whereas just 18 percent feel regulators act in the public’s interest. Similarly, 58 percent of 18-to-29 year-olds are convinced government agencies abuse their powers, while merely 25 percent trust government agencies to do the right thing.”

What could Wichita do, in light of these findings? One thing is to stop its heavy-handed regulation of development, particularly the massive subsidies directed to downtown Wichita.

We should take steps to make sure that everyone is treated equally. Passing “pay-to-play” ordinances — where city council members or county commissioners are prohibited from voting on matters that would enrich their campaign contributors — would be a first step in regaining the trust of citizens.

We also need to reform our economic development practice to favor entrepreneurship. Millennials like to start businesses, the survey tells us: “55 percent of millennials say they’d like to start their own business one day and that hard work is the key to success (61 percent). Millennials also have a positive view of the profit motive (64 percent) and competition (70 percent).” red-tape-person-upsetMuch of our economic development practice consists of directing subsides to our existing large firms or large firms we hope to lure here. But young and small firms — entrepreneurial firms, in other words — can’t qualify for most of our incentive programs. For example. the programs that offer property tax abatements have lengthy application forms and other obstacles to overcome, plus annual fees. Sometimes there are minimum size requirements. Young firms can’t suffer through this red tape and the accompanying bureaucratic schedules.

WichitaLiberty.TV: Wichita economic development, one more untold story

In this excerpt from Wichitaliberty.TV: Readers of the Wichita Eagle might be excused for not understanding the economic realities of a proposed tax giveaway to a local development. View below, or click here to view at YouTube. Originally broadcast September 14, 2014.

For more on this issue, see: Wichita economic development, one more untold story.

WichitaLiberty.TV: Flipping in Wichita, price of sin going up, and what your legislature wants you to know

In this episode of WichitaLiberty.TV: In Wichita, historic value is gone in a flash, a flip-flop on drivers permits, and does the city really believe in transparency or was it just a way to get votes? Then, let’s stop calling a vice a sin, and what does the Kansas Legislature really want you to know? View below, or click here to view on YouTube. Episode 74, broadcast February 8, 2015.

WichitaLiberty.TV: Radio show host Joseph Ashby

In this episode of WichitaLiberty.TV: Radio talk show Joseph Ashby appears to talk about transparency in the Kansas Legislature and the State of the City Address for Wichita. View below, or click here to view at YouTube. Episode 73, broadcast February 1, 2015.

The video of Titus referred to is now available here.

WichitaLiberty.TV: Wichita city government and upcoming elections

In this episode of WichitaLiberty.TV: We’ll take a look at how city government and council meetings operate. Then, there are city elections coming up. How can you get involved? How can you decide which candidates to support? View below, or click here to view at YouTube. Episode 71, broadcast January 18, 2015.

Wichita city hall falls short in taxpayer protection

An incentives agreement the Wichita city council passed on first reading is missing several items that city policy requires. How the council and city staff handle the second reading of this ordinance will let us know for whose interests city hall works: citizens, or cronies.

This week I presented the Wichita City Council my concerns about an inadequate developer agreement for a TIF district development project, the Mosley Avenue Project.

My presentation centered on the lack of an agreement by the developer to forgo appeals of the tax valuation of the property. The applicant had done this in the past, and it caused a shortfall of TIF revenue that the city had to makeup. The city manager had said that taxpayers would be protected in future deals, but the city did not include this protection in the Mosely agreement.

The omission of this taxpayer protection was not all that was missing. The Downtown Development Incentives Policy, revised by the council on June 10, 2014, calls for several items to be supplied when seeking incentives, including tax increment financing, which was the incentive requested for the Mosely project. As I show below, many significant items related to taxpayer protection were missing.

The council approved the project on first reading, noting that the development agreement would be finalized in time for second reading.

This is insufficient. The second reading of an ordinance is usually handled as part of the consent agenda. This is a grouping of items that are voted on as a group, in bulk. There is no discussion unless a council member specifically requests. The practice of the city is that the text of the ordinances on second reading is not made available in the agenda packet, even though changes may have been made between first reading and second reading. That will certainly be the case with this ordinance, as many things are missing from the development agreement.

It’s not clear why there is a first reading and a second reading of an ordinance. It may be so that details may be corrected. Or, perhaps council members would like to have a chance to reconsider their first vote. City code seems to give no guidance as to how much change to an ordinance is allowable between first and second reading.

The problem we face in Wichita is that the approval of a development plan in a TIF district has a mandated public hearing. It is not optional. But the motion passed by the council this week closed the public hearing. Yet, the city will need to make substantial changes to the ordinance and development agreement if it intends to follow the downtown incentives policy that it created. But the public will have no chance to comment on the new material. If past city practice is followed, the new material will not be made available to the public, and perhaps not to council members.

This is a conflict that I do not believe can be resolved unless the city reopens the public hearing for consideration of the revised ordinance and developer agreement on first reading. Anything else disrespects procedures that are designed to benefit and protect the public.

Except. As with many city council policies, there are loopholes. As outlined below, the council can simply vote to waive the requirements of the downtown incentives policy. That gives the council an easy out. But that makes another mockery of the city’s policies, if the council waives them whenever they are inconvenient.

When I presented the defect in the development agreement to the council I asked: Is this lack of taxpayer protection an oversight, or is it by design? There was no answer.

I did not ask this question, but didn’t any city council member notice the omission of significant items needed to comply with its own policies? What about the city manager? Economic development director? City attorney?

More importantly, who in city hall looking out for the interests of taxpayers? Could the generous campaign contributions of Burk and his wife be a factor in this missing taxpayer protection? Or the generous contributions of Key Construction and its executives? (Key Construction is frequently used by Burk.) This is one more incident illustrating the need for campaign finance reform in Wichita.

Missing items

Section D of the incentives policy states “parties requesting Downtown Development Incentives must submit the information listed below.” Significant missing items included the following:

CEDBR Fiscal Impact Model
The idea behind the city’s use of economic development incentives is that the city receives more than it spends or forgoes in future tax revenue. An analysis performed by the Center for Economic Development and Business Research (CEDBR) at Wichita State University is used to make this decision. This appears to have not been done for this project.

Guarantee for a proportional share of public revenue shortfall
This was not present in the developer agreement.

Economic analysis confirms that the project is infeasible “but for” public investment
This was not present in the developer agreement.

Minimum private to public capital investment ratio of 2 to 1
Information necessary to make this judgment was not included in the agenda presentation.

Pro Forma
The incentives policy states: “Pro Forma — The project pro forma will be evaluated on the following criteria:
a. Rate of private investment return
b. Rents/prices consistent with performance of comparables
c. Projected rate of absorption consistent with performance of comparables
d. Long-term project solvency”
It appears that this analysis was not performed.

“Gap” Financing Requirement
The downtown incentives policy states: “Approval of Downtown Development Incentives will require a financial analysis demonstrating that the project would not otherwise be possible without the use of the requested development incentive (“gap” analysis). Parties requesting Downtown Development Incentives will be required to provide the City pro forma cash flow analyses and sources and uses of funds in sufficient detail to demonstrate that reasonably available conventional debt and equity financing sources are not available to fund the entire cost of the project and still provide the developer a reasonable market rate of return on investment.”

There is no evidence that this analysis was performed and made available to the council.

Waiver
The incentives policy contains a loophole. If the council believes it is “inappropriate to evaluate a particular request for Downtown Development Incentives” using the policy, it may vote to waive the requirements.

Wichita TIF projects: some background

Tax increment financing disrupts the usual flow of tax dollars, routing funds away from cash-strapped cities, counties, and schools back to the TIF-financed development. TIF creates distortions in the way cities develop, and researchers find that the use of TIF means lower economic growth.

The consideration this week by the Wichita City Council of two project plans in tax increment financing districts offers an opportunity to examine the issues surrounding TIF.

How TIF works

A TIF district is a geographically-defined area. In Kansas cities establish the borders. After the TIF district is defined, cities then approve one or more project plans that authorize the spending of TIF funds in specific ways.

Figure 1.
Figure 1.
Before the formation of the TIF district, the property pays taxes to the city, county, school district, and state as can be seen in figure 1. Because property considered for TIF is purportedly blighted, the amount of tax paid is usually small. Whatever it is, that level is called the “base.”

Figure 2.
Figure 2.
After approval of one or more TIF project plans the city borrows money and gives it to the project or development. The city now has additional debt in the form of TIF bonds that require annual payments. Figure 2 illustrates. (There is now another form of TIF known as “pay-as-you-go” that works differently, but produces much the same economic effect.)

Figure 3.
Figure 3.
Figure 3 shows the flow of tax revenue after the formation of the TIF district and after the completion of a project or development. Because buildings were built or renovated, the property is worth more, and the property tax is now higher. The development now has two streams of property tax payments that are handled in different ways. The original tax — the “base” — is handled just like before, distributed to city, state, school district, and the state, according to their mill levy rates. The difference between the new tax and the base tax — the “increment” — is handled differently. It goes to only two destinations: The State of Kansas, and repayment of the TIF bonds.

Figure 4.
Figure 4.
Figure 4 highlights the difference in the flow of tax revenues. The top portion of the illustration shows development outside of TIF. We see the flows of tax payments to city, county, school district, and the state. In the bottom portion, which shows development under TIF, the tax flows to city, county, and school district are missing. No longer does a property contribute to the support of these three units of government, although the property undoubtedly requires the services of them. This is especially true for a property in Old Town, which consumes large amounts of policing.

(Cities, counties, and school districts still receive the base tax payments, but these are usually small, much smaller than the incremental taxes. In non-TIF development, these agencies still receive the base taxes too, plus whatever taxes result from improvement of the property — the “increment,” so to speak. Or simply, all taxes.)

This rerouting of property taxes under TIF goes against the grain of the way taxes are usually rationalized. We use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from benefiting from police protection.

So when we pay property tax — or any tax, for that matter — people may be comforted knowing that it goes towards police and fire protection, street lights, schools, and the like. (Of course, some is wasted, and government is not the only way these services, especially education, could be provided.)

But TIF is contrary to this justification of taxes. TIF allows property taxes to be used for one person’s (or group of persons) exclusive benefit. This violates the principle of broad-based taxation to pay for an array of services for everyone. Remember: What was the purpose of the TIF bonds? To pay for things that benefited the development. Now, the development’s property taxes are being used to repay those bonds instead of funding government.

One more thing: Defenders of TIF will say that the developers will pay all their property taxes. This is true, but only on a superficial level. We now see that the lion’s share of the property taxes paid by TIF developers are routed back to them for their own benefit.

It’s only infrastructure

In their justification of TIF in general, or specific projects, proponents may say that TIF dollars are spent only on allowable purposes. Usually a prominent portion of TIF dollars are spent on infrastructure. This allows TIF proponents to say the money isn’t really being spent for the benefit of a specific project. It’s spent on infrastructure, they say, which they contend is something that benefits everyone, not one project specifically. Therefore, everyone ought to pay.

This attitude is represented by a comment left at Voice for Liberty, which contended: “The thing is that real estate developers do not invest in public streets, sidewalks and lamp posts, because there would be no incentive to do so. Why spend millions of dollars redoing or constructing public streets when you can not get a return on investment for that”

This perception is common: that when we see developers building something, the City of Wichita builds the supporting infrastructure at no cost to the developers. But it isn’t quite so. About a decade ago a project was being developed on the east side of Wichita, the Waterfront. This project was built on vacant land. Here’s what I found when I searched for City of Wichita resolutions concerning this project:

Figure 5. Waterfront resolutions.
Figure 5. Waterfront resolutions.
Note specifically one item: $1,672,000 for the construction of Waterfront Parkway. To anyone driving or walking in this area, they would think this is just another city street — although a very nicely designed and landscaped street. But the city did not pay for this street. Private developers paid for this infrastructure. Other resolutions resulted in the same developers paying for street lights, traffic signals, sewers, water pipes, and turning lanes on major city streets. All this is infrastructure that we’re told real estate developers will not pay for. But in order to build the Waterfront development, private developers did, with a total cost of these projects being $3,334,500. (It’s likely I did not find all the resolutions and costs pertaining to this project, and more development has happened since this research.)

In a TIF district, these things are called “infrastructure” and will be paid for by the development’s own property taxes — taxes that must be paid in any case. Outside of TIF districts, developers pay for these things themselves.

If not for TIF, nothing will happen here

Generally, TIF is justified using the “but-for” argument. That is, nothing will happen within a district unless the subsidy of TIF is used. Paul F. Byrne explains:

“The but-for provision refers to the statutory requirement that an incentive cannot be awarded unless the supported economic activity would not occur but for the incentive being offered. This provision has economic importance because if a firm would locate in a particular jurisdiction with or without receiving the economic incentive, then the economic impact of offering the incentive is non-existent. … The but-for provision represents the legislature’s attempt at preventing a local jurisdiction from awarding more than the minimum incentive necessary to induce a firm to locate within the jurisdiction. However, while a firm receiving the incentive is well aware of the minimum incentive necessary, the municipality is not.”

It’s often thought that when a but-for justification is required in order to receive an economic development incentive, financial figures can be produced that show such need. Now, recent research shows that the but-for justification is problematic. In Does Chicago’s Tax Increment Financing (TIF) Programme Pass the ‘But-for’ Test? Job Creation and Economic Development Impacts Using Time-series Data, author T. William Lester looked at block-level data regarding employment growth and private real estate development. The abstract of the paper describes:

“This paper conducts a comprehensive assessment of the effectiveness of Chicago’s TIF program in creating economic opportunities and catalyzing real estate investments at the neighborhood scale. This paper uses a unique panel dataset at the block group level to analyze the impact of TIF designation and investments on employment change, business creation, and building permit activity. After controlling for potential selection bias in TIF assignment, this paper shows that TIF ultimately fails the ‘but-for’ test and shows no evidence of increasing tangible economic development benefits for local residents.” (emphasis added)

In the paper, the author clarifies:

“To clarify these findings, this analysis does not indicate that no building activity or job crea-tion occurred in TIFed block groups, or resulted from TIF projects. Rather, the level of these activities was no faster than similar areas of the city which did not receive TIF assistance. It is in this aspect of the research design that we are able to conclude that the development seen in and around Chicago’s TIF districts would have likely occurred without the TIF subsidy. In other words, on the whole, Chicago’s TIF program fails the ‘but-for’ test.

Later on, for emphasis:

“While the findings of this paper are clear and decisive, it is important to comment here on their exact extent and external validity, and to discuss the limitations of this analysis. First, the findings do not indicate that overall employment growth in the City of Chicago was negative or flat during this period. Nor does this research design enable us to claim that any given TIF-funded project did not end up creating jobs. Rather, we conclude that on-average, across the whole city, TIF was unsuccessful in jumpstarting economic development activity — relative to what would have likely occurred otherwise.” (emphasis in original)

The author notes that these conclusions are specific to Chicago’s use of TIF, but should “should serve as a cautionary tale.”

The paper reinforces the problem of using tax revenue for private purposes, rather than for public benefit: “Essentially, Chicago’s extensive use of TIF can be interpreted as the siphoning off of public revenue for largely private-sector purposes. Although, TIF proponents argue that the public receives enhanced economic opportunity in the bargain, the findings of this paper show that the bargain is in fact no bargain at all.”

TIF is social engineering

TIF represents social engineering. By using it, city government has decided that it knows best where development should be directed. In particular, the Wichita city council has decided that Old Town and downtown development is on a superior moral plane to other development. Therefore, we all have to pay higher taxes to support this development. What is the basis for saying Old Town developers don’t have to pay for their infrastructure, but developers in other parts of the city must pay?

TIF doesn’t work

Does TIF work? It depends on what the meaning of “work” is.

If by working, do we mean does TIF induce development? If so, then TIF usually works. When the city authorizes a TIF project plan, something usually gets built or renovated. But this definition of “works” must be tempered by a few considerations.

Does TIF pay for itself?
First, is the project self-sustaining? That is, is the incremental property tax revenue sufficient to repay the TIF bonds? This has not been the case with all TIF projects in Wichita. The city has had to bail out two TIFs, one with a no-interest and low-interest loan that cost city taxpayers an estimated $1.2 million.

The verge of corruption
Second, does the use of TIF promote a civil society, or does it lead to cronyism? Randal O’Toole has written:

“TIF puts city officials on the verge of corruption, favoring some developers and property owners over others. TIF creates what economists call a moral hazard for developers. If you are a developer and your competitors are getting subsidies, you may simply fold your hands and wait until someone offers you a subsidy before you make any investments in new development. In many cities, TIF is a major source of government corruption, as city leaders hand tax dollars over to developers who then make campaign contributions to re-elect those leaders.”

We see this in Wichita, where the regular recipients of TIF benefits are also regular contributors to the political campaigns of those who are in a position to give them benefits. The corruption is not illegal, but it is real and harmful, and calls out for reform. See In Wichita, the need for campaign finance reform.

The effect of TIF on everyone
Third, what about the effect of TIF on everyone, that is, the entire city or region? Economists have studied this matter, and have concluded that in most cases, the effect is negative.

An example are economists Richard F. Dye and David F. Merriman, who have studied tax increment financing extensively. Their article Tax Increment Financing: A Tool for Local Economic Development states in its conclusion:

“TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.”

So TIF districts are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:

“If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.

We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.” (emphasis added)

In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.” (emphasis added)

The Wichita city council is concerned about creating jobs, and is easily swayed by the promises of developers that their establishments will create jobs. Paul F. Byrne of Washburn University has examined the effect of TIF on jobs. His recent report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and in its abstract we find this conclusion regarding the impact of TIF on jobs:

“This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.” (emphasis added)

These studies and others show that as a strategy for increasing the overall wellbeing of a city, TIF fails to deliver prosperity, and in fact, causes harm.

Wichita loan agreement subject to interpretation

In 2009 the City of Wichita entered into an ambiguous agreement to grant a forgivable loan, and then failed to follow its own agreement. Worse yet, there has been no improvement to similar contracts. Such agreements empower the city to grant favor at its discretion.

In 2009 the City of Wichita granted a forgivable loan of $25,000 to a company named Premier Processing. In a separate transaction, Sedgwick County did the same. A forgivable loan starts with a grant of cash to a company. The company agrees to conditions or benchmarks, commonly to employ a certain number of people for the period of the loan, usually five years. If these benchmarks are met, the company does not need to repay the loan or any interest. Hence, “forgivable.” If benchmarks are not met, contracts may have “clawback” provisions that are designed to protect taxpayers from the effects of a bad investment in an economic development incentive.

Unfortunately, Premier Processing was not able to meet the conditions of the loan, and at the end of the five year loan period, it repaid the loan principal to both the city and county. That was due to a clawback provision contained in the loan contract.

But the loan contract is confusing. The loan contract, as explained below, appears to call for the payment of interest in case the company is not able to meet the benchmarks. But the city doesn’t interpret the contract that way.

Further, a person reading the contract could reasonably assume that the performance of the company compared to the benchmarks is evaluated each year, and clawback provisions enforced at that time if needed. But that is not the city’s interpretation of the contract.

Is this confusing? Yes, it is. And things haven’t improved. A forgivable loan made by the city last month holds the same language, and also the same potential for confusion.

Clawbacks are problematic. When a company has not achieved its benchmarks, it is likely because the company is not performing well financially and economically. So the company may not have the capacity to make the clawback payments. If a company is struggling financially, aggressively pursuing clawbacks might be the factor that forces a company to shut down. That means fewer jobs. Would it be better to let the company retain its incentives and the city forgo enforcement of clawbacks, even though the company hasn’t met the benchmarks? It is presumably providing some good, after all.

There’s also the consideration that if clawback provisions are strict and cities boast that they will aggressively pursue clawback payments, will companies be discouraged from applying for incentives?

Finally, during the sales tax campaign we were promised greater transparency of economic development activities if the sales tax passed. If transparency would be good in that case, it is also good right now, and should have been provided in the past. But the city made no effort to let citizens know of this episode in our economic development history. In fact, obtaining information about this matter has been difficult.

The confusing loan contract

The relevant pages of the city council agenda packet from August 2009, including the contract controlling the terms of the loan, may be viewed here. Of note is the schedule of forgiveness of debt.

Premier Processing forgiveness of debt schedule.
Premier Processing forgiveness of debt schedule.

Here’s a table of yearly employment benchmarks as supplied by Sedgwick County. (The city was not willing to produce the data it had regarding this.)

Premier Processing schedule of benchmarks from Sedgwick County.
Premier Processing schedule of benchmarks from Sedgwick County.

(Note: In the 2009 agreement, for cumulative wages promised in 2013, the city document has the value $3,618,000. In the data from the county, $2,615,000 is used. The city’s number is probably a typographical error, as the county-supplied number is more in line with a smooth progression from year to year. In either case, actual cumulative wages were less, which is the controlling factor. The amount by which the benchmark was missed does not figure into the calculation.)

In the “FORGIVABLE LOAN AGREEMENT and PROMISSORY NOTE” dated August 11, 2009, Section 2 creates a schedule of employment and wage goals, as shown above. This section also establishes the “first anniversary date” as being August 11, 2010. It also speaks of “each scheduled anniversary thereafter.” Using the customary meaning of “anniversary” that seems to establish August 11 for each succeeding year as an anniversary date.

Section (16) (a) (i) of the agreement holds this language: “If, on the scheduled anniversary, employment levels are below the minimums specified in item (2) of this Agreement, the following repayment is required within thirty (30) days:
a) the outstanding principal balance will be divided by the number of remaining anniversary dates, to produce the principal amount due, plus
b) interest accrued since the previously scheduled anniversary date.”

Looking at the plain meaning of section 16, it seems like for each anniversary date the city would perform this analysis: Based on the calculation specified in section (16) (a) (i), on the 2010 anniversary date, first, calculate “outstanding principal balance will be divided by the number of remaining anniversary dates, to produce the principal amount due.” This calculation is $25,000 / 4 = $6,250.

Then calculate “interest accrued since the previously scheduled anniversary date.” Section 16 (A) (iv) (a) gives 12 percent as the interest rate to be applied in case of default. 12 percent of $6,250 is $750.

Based on the default condition that existed on the first anniversary date, the borrower should have repaid $6,250 + $750 = $7,000. Similar calculations could be made for the following anniversary dates, as on each date the borrower was in default.

But this is not what happened. For one, the city did not collect interest. Correspondence with Tim Goodpasture of the city’s economic development office explained: “The company did not meet the stated objectives. The agreement states that if it does not it may have to repay the principal plus accrued interest. The interest rate defined in this agreement is 0.0% per annum.”

In a telephone call with Goodpasture, I explained my understanding of the contract with payments required on each anniversary date if benchmarks were not met. He said that the clawbacks were enforced. Since the company is still in operation in Wichita, no interest is due.

Goodpasture further explained that the city monitors performance each year. At the end of the loan period, the city looks back at the entire loan, examining year-by-year whether the terms were met. Since the company was not in compliance in any year, it repaid the entire loan. But since the company was still in operation in Wichita, there is no interest due, he explained.

It seems that the confusion derives from the meaning of “anniversary date.” The city seems to follow a policy that at the end of the loan period, which is five years in this case, there will be a retrospective examination that looks at employment levels on each anniversary date.

But the plain language of the contract says “If, on the scheduled anniversary, employment levels are below the minimums specified in item (2) of this Agreement, the following repayment is required within thirty (30) days.” (emphasis added) This seems to establish a yearly examination of the borrowing company, and if the benchmarks are not met, then repayment is required then (within 30 days). Not at the end of the loan term.

But there is this language in section 2 of the contract: “2) Forgiveness of Debt: The Borrower promises to create and maintain minimum employment levels at the Wichita, Kansas facility by August 11, 2014 as shown in the following schedule.” This seems to indicate an examination of the benchmarks at the end of the five-year loan period, which is what the city did. (Except it didn’t charge interest, which it the contract calls for.)

Wichitaliberty.TV: Special taxes for artists

In this excerpt from WichitaLiberty.TV: Wichita government spending on economic development leads to imagined problems that require government intervention and more taxpayer contribution to resolve. The cycle of organic rebirth of cities is then replaced with bureaucratic management. Originally broadcast December 7, 2014. View below, or click here to view at YouTube.

For more on thiss issue, see City of Wichita State Legislative Agenda: Cultural Arts Districts.

A chance for Wichita to embrace transparency

Promises of transparency were made during the recent Wichita sales tax campaign. If the city cares about government transparency, the city should implement its campaign promises, even though the tax did not pass.

During the campaign for the one cent per dollar sales tax that Wichita voters rejected in November, a city document promised that if the tax passed “The process will be transparent, with reports posted online outlining expenditures and expected outcomes.”

The “Yes Wichita” campaign promised “Reports will be measured and reported publicly.”

These are good ideas. The city, county, and state should do these things.

They should do them even though the sales tax did not pass. But that hasn’t happened.

During September, during the heart of a campaign, I became aware of a Wichita company that received a forgivable loan from the City of Wichita, and a similar loan from Sedgwick County. The company was not able to meet the commitments required in the loan document, and was required to repay the loan.

Did you know this? Did either Sedgwick County or the City of Wichita make any effort to publicize this? This seems to be the type of information the city and the “Yes Wichita” campaign said would be provided if the sales tax passed. We were promised a website. If it’s good for citizens to have this type of information if the sales tax had passed, it’s good for them to know in any circumstance.

But neither governmental agency thought citizens needed to know about the company that was not able to meet the terms of its forgivable loan. There was no website, no press release. Nothing. My efforts to obtain the information from the city were met with resistance.

It’s not like the communications staffs are overwhelmed and have no time to provide this type of information. The county’s communications director starts each commission meeting with some sort of trivia contest or other prelude that contributes nothing except the waste of time. During the sales tax campaign Wichita city staff had time to prepare news releases with titles like “City to Compete in Chili Cook-off” and “Jerry Seinfeld Returns to Century II.”

A cynical person might conclude that transparency was dangled only to get people to vote for the sales tax, not as a governing principle.

Clawbacks illustrate difficulty of economic development

Politicians and government officials like clawbacks in economic development incentive agreements. But do these provisions have any negative aspects?

When business firms receive economic development incentives from government, the incentives may be given conditionally. That is, there may be benchmarks or conditions that the company has agreed to meet. These benchmarks are most commonly in the form of job counts or payroll value, and sometimes capital investment.

But what happens if the company does not meet the benchmarks? Some agreements have clawback provisions that come into play at this time. Sometime the company may be required to repay all or part of the value of incentives that were received. Or, perhaps the company will not be eligible to receive additional incentives that were planned.

Government officials like the idea of clawbacks. It lets them appear to be responsible in the awarding of incentives. Politicians and bureaucrats tell voters that government is looking out for them. If a company accepts incentives and doesn’t create every last job that was promised, by golly, the politicians say, we’re going to get back the taxpayers’ money for them.

Clawbacks can be useful. If a company fraudulently seeks and receives incentives, it’s good there’s a way to retrieve the money. More commonly, however, the clawbacks are to protect taxpayers in case the business plans do not work out as hoped, and the promised jobs are not delivered.

It’s understandable that taxpayers want to see clawbacks in place to protect their investment. We realize that politicians want to appear to be responsible with taxpayer funds. But there are several problems. When a company has not achieved its benchmarks, it is likely because the company is not performing well financially and economically. The company may not have the capacity to make the clawback payments. This recently happened in Wichita with a company that had received a forgivable loan. The company did not meet the required benchmarks, and was not able to repay the loan. The city is allowing them to make their clawback payments over time.

City diverted funds to Walmart projectSometimes government may choose not to enforce clawbacks that have been agreed to. In the case of a Wichita company that had received a property tax abatement but suffered a downtown in its business and was not able to meet the benchmarks, the city’s economic development director told the city council “I don’t think it would be productive at this time to further penalize them — as the market has already penalized them — by putting them back on the tax rolls at this time.” In another Wichita example, the city had a personal guarantee from a real estate developer to cover shortfalls in a tax increment financing district, But instead of holding the developer to the terms of the contract, the city issued a bailout. I estimated the cost to city taxpayers at about $30,000 per year, or $516,000 over the course of the loan.

These examples reveal a problem with clawbacks. Will struggling companies be able to pay the clawback? If a company is struggling financially and hasn’t met the benchmarks, aggressively pursuing clawback payments might be the factor that forces a company to shut down. That means fewer jobs. Would it be better to let the company retain its incentives and continue to operate, even though it hasn’t met the benchmarks? It is presumably providing some good, after all.

There’s also the consideration that if clawback provisions are too strict, will companies be discouraged from applying for incentives? A recent loan considered by the Sedgwick County Commission contemplated one or more of four different forms of security: a mortgage, a security agreement, a collateral assignment of life insurance, or a corporate guaranty.

friedman-spending-categories-2013-07The issue of clawbacks is a window into the difficulties of economic development incentives. Officials tell us they are making an investment in the community’s future. But it’s a transaction unlike any investment decision made in the private economy. For one, government officials are not spending and investing their own money (or shareholders’ money) for their own benefit (or shareholders’ benefit). Instead, they’re using someone else’s money, and spending it on still someone else. As Milton Friedman has noted, this is absolutely the worst way to spend money. (Click here for an explanation of the diagram.)

When negotiating clawback provisions, similar considerations apply. The government’s economic development officials are not negotiating over the security of their own investment. To them, it’s someone else’s money. They did not earn or raise it, and ultimately they are not responsible for it. But for the party across the table — the business firm — the transaction concerns their own money, and the motivations and responsibilities are very different.

Year in Review: 2014

Here is a sampling of stories from Voice for Liberty in 2014.

January

A transparency agenda for Wichita
Kansas has a weak open records law, and Wichita doesn’t want to follow the law, as weak as it is. But with a simple change of attitude towards open government and citizens’ right to know, Wichita could live up to the goals its leaders have set.

New York Times on Kansas schools, again
The New York Times — again — intervenes in Kansas schools. As it did last October, the newspaper makes serious errors in its facts and recommendations.

Visit Wichita, and pay a tourism fee
The Wichita City Council will consider adding a 2.75 percent tax to hotel bills, calling it a “City Tourism Fee.” Welcome to Wichita!

Wichita’s growth in gross domestic product
Compared to peer areas, Wichita’s record of growth in gross domestic product is similar to that of job creation: Wichita performs poorly.

The death penalty in Kansas, a conservative view
What should the attitude of conservatives be regarding the death penalty? Ben Jones of Conservatives Concerned about the Death Penalty spoke on the topic “Capital Punishment in Kansas from a conservative perspective: Is it a failed policy?”

Kansas school test scores, the subgroups
To understand Kansas school test scores, look at subgroups. Sometimes Kansas ranks very well among the states. In other instances, Kansas ranks much lower, even below the national average. It’s important for Kansans — be they citizens, schoolchildren, parents, education professionals, or (especially) politicians of any party — to understand these scores.

The state of Wichita, 2014
Wichita Mayor Carl Brewer delivered the annual State of the City address. He said a few things that deserve discussion.

February

In Wichita, why do some pay taxes, and others don’t?
A request by a luxury development in downtown Wichita raises issues, for example, why do we have to pay taxes?

Wichita considers policy to rein in council’s bad behavior
he Wichita City Council considers a policy designed to squelch the council’s ability to issue no-bid contracts for city projects. This policy is necessary to counter the past bad behavior of Wichita Mayor Carl Brewer and several council members, as well as their inability to police themselves regarding matters of ethical behavior by government officials.

Our Kansas grassroots teachers union
Letters to the editor in your hometown newspaper may have the air of being written by a concerned parent of Kansas schoolchildren, but they might not be what they seem.

Wichita’s legislative agenda favors government, not citizens
This 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.

Wichita planning documents hold sobering numbers
The documents hold information that ought to make Wichitans think, and think hard. The amounts of money involved are large, and portions represent deferred maintenance. That is, the city has not been taking care of the assets that taxpayers have paid for.

In Wichita, citizens want more transparency in city government
In a videographed meeting that is part of a comprehensive planning process, Wichitans openly question the process, repeatedly asking for an end to cronyism and secrecy at city hall.

March

Special interests struggle to keep special tax treatment
When a legislature is willing to grant special tax treatment, it sets up a battle to keep — or obtain — that status. Once a special class acquires preferential treatment, others will seek it too.

In Wichita, West Bank apartments seem to violate ordinance
Last year the Wichita City Council selected a development team to build apartments on the West Bank of the Arkansas River, between Douglas Avenue and Second Street. But city leaders may have overlooked a Wichita City Charter Ordinance that sets aside this land to be “open space, committed to use for the purpose of public recreation and enjoyment.”

In Wichita, pushing back at union protests
A Wichita automobile dealer is pushing back at a labor union that’s accusing the dealer of unfair labor practices.

Wichita City Council to consider entrenching power of special interest groups
The Wichita City Council will consider a resolution in support of the status quo for city elections. Which is to say, the council will likely express its support for special interest groups whose goals are in conflict with the wellbeing of the public.

State employment visualizations
There’s been dueling claims and controversy over employment figures in Kansas and our state’s performance relative to others. I present the actual data in interactive visualizations that you can use to make up your own mind.

State and local government employment levels vary
The states vary widely in levels of state government and local government employees, calculated on a per-person basis. Only ten states have total government employee payroll costs greater than Kansas, on a per-person basis.

April

Wichita not good for small business
When it comes to having good conditions to support small businesses, well, Wichita isn’t exactly at the top of the list, according to a new ranking from The Business Journals.

Cronyism is welfare for rich and powerful, writes Charles G. Koch
“The central belief and fatal conceit of the current administration is that you are incapable of running your own life, but those in power are capable of running it for you. This is the essence of big government and collectivism,” writes Charles G. Koch in the Wall Street Journal.

Rich States, Poor States for 2014 released
In the 2014 edition of Rich States, Poor States, Utah continues its streak at the top of Economic Outlook Ranking, meaning that the state is poised for growth and prosperity. Kansas continues with middle-of-the-pack performance rankings, and fell in the forward-looking forecast.

Wichita develops plans to make up for past planning mistakes
On several issues, including street maintenance, water supply, and economic development, Wichita government and civic leaders have let our city fall behind. Now they ask for your support for future plans to correct these mistakes in past plans.

May

Poll: Wichitans don’t want sales tax increase
According to a newly released poll from Kansas Policy Institute, Wichitans may want more jobs and a secure water source but they certainly don’t support a sales tax increase as the means to get either. Reporting on this poll is available in these articles: In Wichita, opinion of city spending consistent across party and ideology, Few Wichitans support taxation for economic development subsidies, Wichitans willing to fund basics, and To fund government, Wichitans prefer alternatives to raising taxes.

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.

In Wichita, the streetside seating is illuminated very well
Wichita city leaders tell us that the budget and spending have been cut to the bone. Except for the waste, that is.

Wichita seeks to form entertainment district
A proposed entertainment district in Old Town Wichita benefits a concentrated area but spreads costs across everyone while creating potential for abuse.

In Wichita, capitalism doesn’t work, until it works
Attitudes of Wichita government leaders towards capitalism reveal a lack of understanding. Is only a government-owned hotel able to make capital improvements?

Wichita, again, fails at government transparency
At a time when Wichita city hall needs to cultivate the trust of citizens, another incident illustrates the entrenched attitude of the city towards its citizens. Despite the proclamations of the mayor and manager, the city needs a change of attitude towards government transparency and citizens’ right to know.

Wichita per capita income not moving in a good direction
Despite its problematic nature, per capita income in Wichita is used as a benchmark for the economy. It’s not moving in the right direction. As Wichita plans its future, leaders need to recognize and understand its recent history.

Uber, not for Wichita
A novel transportation service worked well for me on a recent trip to Washington, but Wichita doesn’t seem ready to embrace such innovation.

For Kansas’ Roberts, an election year conversion?
A group of like-minded Republican senators has apparently lost a member. Is the conservative voting streak by Pat Roberts an election year conversion, or just a passing fad?

June

Wichita property taxes compared
An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation.

Government employee costs in the states
The states vary widely in levels of state government and local government employees and payroll costs, calculated on a per-person basis. Kansas ranks high in these costs, nationally and among nearby states.

With new tax exemptions, what is the message Wichita sends to existing landlords?
As the City of Wichita prepares to grant special tax status to another new industrial building, existing landlords must be wondering why they struggle to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage.

Wichita city council schools citizens on civic involvement
Proceedings of a recent Wichita City Council meeting are instructive of the factors citizens should consider if they want to interact with the council and city government at a public hearing.

Forget the vampires. Let’s tackle the real monsters.
Public service announcements on Facebook and Wichita City Channel 7 urge Wichitans to take steps to stop “vampire” power waste. But before hectoring people to introduce inconvenience to their lives in order to save small amounts of electricity, the city should tackle the real monsters of its own creation.

July

Wichita property taxes rise again
The City of Wichita is fond of saying that it hasn’t raised its mill levy in many years. But the mill levy has risen in recent years.

For Wichita leaders, novel alternatives on water not welcome
A forum on water issues featured a presentation by Wichita city officials and was attended by other city officials, but the city missed a learning opportunity.

For Wichita’s new water supply, debt is suddenly bad
Wichita city leaders are telling us we need to spend a lot of money for a new water source. For some reason, debt has now become a dirty word.

Pat Roberts, senator for corporate welfare
Two years ago United States Senator Pat Roberts voted in committee with liberals like John Kerry, Chuck Schumer, and Debbie Stabenow to pass a bill loaded with wasteful corporate welfare.

August

Charles Koch: How to really turn the economy around
Writing in USA Today, Charles Koch offers insight into why our economy is sluggish, and how to make a positive change.

Wichita airport statistics updated
As the Wichita City Council prepares to authorize funding for Southwest Airlines, it’s worth taking a look at updated statistics regarding the airport.

Wichita sales tax hike would hit low income families hardest
Analysis of household expenditure data shows that a proposed sales tax in Wichita affects low income families in greatest proportion, confirming the regressive nature of sales taxes.

Welcome back, Gidget
Gidget stepped away for a few months, but happily she is back writing about Kansas politics at Kansas GOP Insider (wannabe).

September

Wichita planning results in delay, waste
Wichita plans an ambitious road project that turns out to be too expensive, resulting in continued delays for Wichita drivers and purchases of land that may not be needed.

‘Transforming Wichita’ a reminder of the value of government promises
When Wichita voters weigh the plausibility of the city’s plans for spending proposed new sales tax revenue, they should remember this is not the first time the city has promised results and accountability.

Fact-checking Yes Wichita: NetApp incentives
In making the case that economic development incentives are necessary and successful in creating jobs, a Wichita campaign overlooks the really big picture.

Arrival of Uber a pivotal moment for Wichita
Now that Uber has started service in Wichita, the city faces a decision. Will Wichita move into the future by embracing Uber, or remain stuck in the past?

Fact-checking Yes Wichita: Boeing incentives
The claim that the “city never gave Boeing incentives” will come as news to the Wichita city officials who dished out over $600 million in subsidies and incentives to the company.

Beechcraft incentives a teachable moment for Wichita
The case of Beechcraft and economic development incentives holds several lessons as Wichita considers a new tax with a portion devoted to incentives.

For Kansas budget, balance is attainable
A policy brief from a Kansas think tank illustrates that balancing the Kansas budget while maintaining services and lower tax rates is not only possible, but realistic.

To Wichita, a promise to wisely invest if sales tax passes
Claims of a reformed economic development process if Wichita voters approve a sales tax must be evaluated in light of past practice and the sameness of the people in charge. If these leaders are truly interested in reforming Wichita’s economic development machinery and processes, they could have started years ago using the generous incentives we already have.

For Wichita Chamber’s expert, no negatives to economic development incentives
An expert in economic development sponsored by the Wichita Metro Chamber of Commerce tells Wichita there are no studies showing that incentives don’t work.

Water, economic development discussed in Wichita
Dr. Art Hall, Executive Director of the Center for Applied Economics at the University of Kansas School of Business, presented his “Thoughts on Water and Economic Development” at the Wichita Pachyderm Club Friday, September 19, 2014

Stuck in the box in Wichita, part one
To pay for a new water supply, Wichita gives voters two choices and portrays one as bad. But the purportedly bad choice is the same choice the city made over the last decade to pay for the last big water project. We need out-of-the-box thinking here.

October

Kansas economy has been underperforming
Those who call for a return to the economic policies of past Kansas gubernatorial administrations may not be aware of the performance of the Kansas economy during those times.

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.

A simple step towards government transparency in Wichita
Kansas law requires publication of certain notices in newspapers, but cities like Wichita could also make them available in other ways that are easier to use.

While Wichita asks for new taxes, it continues to spend and borrow
The City of Wichita says it doesn’t have enough revenue for things like street maintenance and transit, but continues to borrow for spending on new projects.

Wichita debt levels seen to rise
As part of the campaign for a proposed Wichita sales tax, the city says that debt is bad. But actions the city has taken have caused debt levels to rise, and projections are for further increases.

For Wichita, another economic development plan
The Wichita City Council will consider a proposal from a consultant to “facilitate a community conversation for the creation of a new economic development diversification plan for the greater Wichita region.” Haven’t we been down this road before?

In Wichita, pro-sales tax campaign group uses sales tax-exempt building as headquarters
While “Yes Wichita” campaigns for higher sales taxes, it operates from a building that received a special exemption from paying sales tax.

For Wichita Chamber of Commerce chair, it’s sales tax for you, but not for me
A Wichita company CEO applied for a sales tax exemption. Now as chair of the Wichita Metro Chamber of Commerce, he wants you to pay more sales tax, even on the food you buy in grocery stores.

Should Wichita expand a water system that is still in commissioning stage?
Should we be concerned about rushing a decision to expand a water production system that has not yet proven itself?

Wichita sends educational mailer to non-Wichitans, using Wichita taxes
Why is the City of Wichita spending taxpayer money mailing to voters who don’t live in the city and can’t vote on the issue?

Wichita to consider tax exemptions
A Wichita company asks for property and sales tax exemptions on the same day Wichita voters decide whether to increase the sales tax, including the tax on groceries.

November

In election coverage, The Wichita Eagle has fallen short
Citizens want to trust their hometown newspaper as a reliable source of information. The Wichita Eagle has not only fallen short of this goal, it seems to have abandoned it.

Kansas school spending visualization updated
There’s new data available from Kansas State Department of Education on school spending. I’ve gathered the data, adjusted it for the consumer price index, and now present it in this interactive visualization.

In Kansas, school employment rises again
For the fourth consecutive year, the number of teachers in Kansas public schools has risen faster than enrollment, leading to declining pupil-teacher ratios.

Richard Ranzau, slayer of cronyism
In Sedgwick County, an unlikely hero emerges in the battle for capitalism over cronyism.

Kansans still uninformed on school spending
As in the past, a survey finds Kansans are uninformed or misinformed on the level of school spending, and also on the direction of its change.

In Kansas, voters want government to concentrate on efficiency and core services before asking for taxes
A survey of Kansas voters finds that Kansas believe government is not operating efficiently. They also believe government should pursue efficiency savings, focus on core functions, and spend unnecessary cash reserves before cutting services or raising taxes.

Kansas cities should not unilaterally grant tax breaks
When Kansas cities grant economic development incentives, they may also unilaterally take action that affects overlapping jurisdictions such as counties, school districts, and the state itself. The legislature should end this.

City of Wichita State Legislative Agenda: Cultural Arts Districts
Wichita government spending on economic development leads to imagined problems that require government intervention and more taxpayer contribution to resolve. The cycle of organic rebirth of cities is then replaced with bureaucratic management.

December

City of Wichita State Legislative Agenda: Airfares
The City of Wichita’s legislative agenda regarding the Affordable Airfares subsidy program seems to be based on data not supported by facts.

Options for funding Wichita’s future water supply
Now that the proposed Wichita sales tax has failed, how should Wichita pay for a future water supply?

KU records request seen as political attack
A request for correspondence belonging to a Kansas University faculty member is a blatant attempt to squelch academic freedom and free speech.

Why is this man smiling?
In Wichita, the chair of the Wichita Metro Chamber of Commerce crafts a sweetheart deal for his company to the detriment of Wichita taxpayers.

Wichita Metro Chamber of Commerce: What is the attitude towards taxes?
Does the Wichita Metro Chamber of Commerce support free markets, capitalism, and economic freedom, or something else?

Will the next Wichita mayor advocate enforcing our ethics laws?
Wichita has laws that seem clear. But the city attorney said they don’t mean what they seem to say. Will our next mayor stand up for ethics?

Campaign contribution stacking in Wichita
Those seeking favors from Wichita City Hall use campaign contribution stacking to bypass contribution limits. This has paid off handsomely for them, and has harmed everyone else.

Economic development in Wichita: Looking beyond the immediate
Decisions on economic development initiatives in Wichita are made based on “stage one” thinking, failing to look beyond what is immediate and obvious.

Economic development in Sedgwick County
The issue of awarding an economic development incentive reveals much as to why the Wichita-area economy has not grown.

In Wichita, running government like a business

In Wichita and Sedgwick County, can we run government like a business? Should we even try? Do our leaders think there is a difference?

Sedgwick County Working for YouAs Wichita considers the future of its economy, a larger role for government is contemplated. The views of the people leading the effort to expand government management of the local economy are important to explore. Consider Gary Schmitt, who is an executive at Intrust Bank. Following is an excerpt from the minutes of the May 22, 2013 meeting of the Board of Sedgwick County Commissioners. The topic was a forgivable loan to Starwood Hotels and Resorts Worldwide Inc. These loans are equivalent to a cash grant, as long as conditions are met. At the time of this meeting Schmitt was vice chair of Greater Wichita Economic Development Coalition.

This discourse shows the value of elected officials like Karl Peterjohn, and also Richard Ranzau, as he too contributed to the understanding of this matter. When Michael O’Donnell served on the Wichita City Council, he also contributed in this way.

Here’s what Schmitt told the commissioners, based on the meeting minutes: “I know at the bank where I work, if we had a $1 invested and get a return of over $2.40, we would consider that a very good investment in the future.”

Shortly after that he said “Very similar what we do at the bank when we negotiate loan amounts or rates. So it is very much a business decision to try to figure out how to bring 900 jobs to our community without overspending or over committing.”

Wichita leaders need to understand businessThe problem is that when the bank Schmitt works for makes a loan, there are several forces in play that are not present in government. Perhaps the most obvious is that a bank loans money and expects to be repaid. In the case of the forgivable loan the commission was considering, the goal is that the loan is not repaid. These loans, remember, are a grant of cash, subject to a few conditions. If the recipient company is required to repay the loan, it is because it did not meet conditions such as job count or capital investment. In these circumstances, the company is probably not performing well economically, and therefore may not be able to repay the loan.

Another example of how a bank is different from government is that at a bank, both parties enter the loan transaction voluntarily. The bank’s shareholders and depositors are voluntary participants. Perhaps not explicitly for each loan, but if I do not like the policies or loans my bank has made, I can easily move my shares and deposits to another bank. But for these government loans, I personally have appeared several times before governmental bodies asking that the loan not be made. I did not consent. And changing government is much more difficult than changing banks.

Another difference between Schmitt’s bank and government is that bank’s goal is to earn a profit. Government doesn’t calculate profit. It is not able to, and when it tries, it efforts fall short. For one thing, government conscripts its capital. It faces no market test as to whether it is making good investments. It doesn’t have to compete with other institutions for capital, as a private bank does. Ludwig von Mises taught us that government can’t calculate profit and loss, the essential measure that lets us know if a business is making efficient use of resources. Thomas DiLorenzo elaborated, writing: “There is no such thing as real accounting in government, of course, since there are no profit-and-loss statements, only budgets. Consequently, there is no way of ever knowing, in an accounting sense, whether government is adding value or destroying it.”

An example of this lack of accounting for capital comes from the same governmental body making this forgivable loan. In Intrust Bank Arena depreciation expense is important, even today, I explain that proper attention given to the depreciation expense of Intrust Bank Arena in downtown Wichita would recognize and account for the sacrifices of the people of Sedgwick County and its visitors to pay for the arena. But the county doesn’t do that, at least not in its most visible annual reporting of the arena’s financial results.

Governments locally do have a measure of what they consider to be “profit.” It’s the benefit-cost ratio calculated by the Center for Economic Development and Business Research (CEDBR) at Wichita State University. This is the source of the “$1 invested and get a return of over $2.40″ that Schmitt referenced. But the “benefits” that go into this calculation are quite different from the profits that business firms attempt to earn. Most importantly, the benefits that government claims are not really benefits. Instead, they’re in the form of additional tax revenue paid to government. This is very different from the profits companies earn in voluntary market transactions.

Government usually claims that in order to get these “benefits,” the incentives must be paid. But often the new economic activity (expansion, etc.) would have happened anyway without the incentives. There is much evidence that economic development incentives rank low on the list of factors businesses consider when making investments. A related observation is that if the relatively small investment government makes in incentives is solely or even partially responsible for such wonderful outcomes in terms of jobs, why doesn’t government do this more often? If the Sedgwick County Board of Commissioners has such power to create economic growth, why is anyone unemployed?

Those, like Gary Schmitt, who are preparing to lead Wichita’s efforts in stimulating its economy believe that government should take on a larger role. We need to make sure that these leaders understand the fundamental differences between government and business, and how government can — and can’t — help business grow.

Following is an excerpt from the meeting minutes:

Chairman Skelton said, “Okay, thank you. Anybody else who wishes to speak today? Please state your name and address for the record.”

Mr. Gary Schmitt, (address redacted to respect privacy) greeted the Commissioners and said, “I work at Intrust Bank and I am the Vice-Chair of GWEDC. Thank you for the opportunity to speak to you today. I want to thank all of you also for just saving the county $700,000 by refinancing the bond issue. I think that was a great move. I think that’s exactly what we need to do to help support our county.

Mr. Schmitt said, “Also want to say I think Starwood coming to Wichita with 900 jobs in the very near future is a big win for Wichita, for Sedgwick County and our community. And I just want to encourage you to support the $200,000 investment. I know at the bank where I work, if we had a $1 invested and get a return of over $2.40, we would consider that a very good investment in the future. And I think having 900 people employed in basically starter jobs, or jobs to fill the gap in their financial needs for their families is very important also. So thank you very much for the opportunity to speak. I encourage you to support positive vote on this.”

Chairman Skelton said, “Commissioner Peterjohn.”

Commissioner Peterjohn said, “Mr. Schmidt, I thank you for coming down and speaking today and your efforts on behalf of GWEDC. One of the things I struggle with these issues when they come before the Commission is what is the, how do we come up with an optimum number? I mean, why is $200,000 the right figure for the county’s contribution. And also, I mean, other than the fact that the city approved a similar amount yesterday, and when this comes to us and the calculations are coming from a, I think, a basic input and output model that fluctuates, depending on what assumptions you feed into it, I struggle with, you know, how do we determine, when you get a proposal at the bank, somebody comes in and says, hey, I would like to borrow x number of dollars for this project, we expect a net present value or rate of return of so much, and based on a loan cost of a certain interest rate, we get those very specific calculations. Can you provide any insight, in terms of why $200,000 is the optimal number for this forgivable loan over 5 years, and help me out on that point?”

Mr. Schmitt said, “I’ll try. GWEDC basically is a cooperation between businesses, business community leaders and also the city and the county government. We sort of have all the players at the table. And it’s very similar to what we do at the bank, when somebody comes in and asks for a proposal, we have to understand what our capacity is, what our expectations are, and we analyze all that. By using WSU calculate return on investment, that’s similar to what we do at the bank to calculate our return on investment. Now, I’m sure Starwood would be very excited if we said we will give you $2 million instead of $200,000, but we negotiated a number that we thought was acceptable to Starwood and also us.

“Very similar what we do at the bank when we negotiate loan amounts or rates. So it is very much a business decision to try to figure out how to bring 900 jobs to our community without overspending or over committing. So, Mr. Peterjohn, I think we’ve tried to do everything we can to bring the best deal to the community we possibly can.”

Commissioner Peterjohn said, “Well then help me out, in terms of the point that was raised over, we’ve got a forgivable loan for five years, but the calculation, in terms of return and so on are over 10 years. So basically our clawback provisions don’t exist from year 6 through 10.”

Mr. Schmitt said, “Well…”

Commissioner Peterjohn said, “And then you’ve got that disparity.”

Mr. Schmitt said, “You know, the other interesting thing is they have a 15 year lease out there on the building. So our expectation is they will be a minimum of 15 years. So do we do it on 5, 10, or 15 years. So, I understand your question. I don’t know the answer to that.”

Commissioner Peterjohn said, “Okay. Thank you for coming down and providing…” Mr. Schmitt said, “You are welcome. Thank you.”

Economic development in Wichita: Looking beyond the immediate

Decisions on economic development initiatives in Wichita are made based on “stage one” thinking, failing to look beyond what is immediate and obvious.

Critics of the economic development policies in use by the City of Wichita are often portrayed as not being able to see and appreciate the good things these policies are producing, even though they are unfolding right before our very eyes. The difference is that some look beyond the immediate — what is seen — and ask “And then what will happen?” — looking for the unseen.

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

When we are talking about applied economic policies, we are no longer talking about pure economic principles, but about the interactions of politics and economics. The principles of economics remain the same, but the likelihood of those principles being applied unchanged is considerably reduced, because politics has its own principles and imperatives. It is not just that politicians’ top priority is getting elected and re-elected, or that their time horizon seldom extends beyond the next election. The general public as well behaves differently when making political decisions rather than economic decisions. Virtually no one puts as much time and close attention into deciding whether to vote for one candidate rather than another as is usually put into deciding whether to buy one house rather than another — or perhaps even one car rather than another.

The voter’s political decisions involve having a minute influence on policies which affect many other people, while economic decision-making is about having a major effect on one’s own personal well-being. It should not be surprising that the quantity and quality of thinking going into these very different kinds of decisions differ correspondingly. One of the ways in which these decisions differ is in not thinking through political decisions beyond the immediate consequences. When most voters do not think beyond stage one, many elected officials have no incentive to weigh what the consequences will be in later stages — and considerable incentives to avoid getting beyond what their constituents think and understand, for fear that rival politicians can drive a wedge between them and their constituents by catering to public misconceptions.

The economic decisions made by governing bodies like the Wichita City Council have a large impact on the lives of Wichitans. But as Sowell explains, these decisions are made by politicians for political reasons.

Sowell goes on to explain the danger of stopping the thinking process at stage one:

When I was an undergraduate studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what policy I favored on a particular issue of the times. Since I had strong feelings on that issue, I proceeded to answer him with enthusiasm, explaining what beneficial consequences I expected from the policy I advocated.

“And then what will happen?” he asked.

The question caught me off guard. However, as I thought about it, it became clear that the situation I described would lead to other economic consequences, which I then began to consider and to spell out.

“And what will happen after that?” Professor Smithies asked.

As I analyzed how the further economic reactions to the policy would unfold, I began to realize that these reactions would lead to consequences much less desirable than those at the first stage, and I began to waver somewhat.

“And then what will happen?” Smithies persisted.

By now I was beginning to see that the economic reverberations of the policy I advocated were likely to be pretty disastrous — and, in fact, much worse than the initial situation that it was designed to improve.

Simple as this little exercise may sound, it goes further than most economic discussions about policies on a wide range of issues. Most thinking stops at stage one.

We see stage one thinking all the time when looking at government. In Wichita, for example, a favorite question of city council members seeking to justify their support for government intervention such as a tax increment financing (TIF) district or some other form of subsidy is “How much more tax does the building pay now?” Or perhaps “How many jobs will (or did) the project create?”

These questions, and the answers to them, are examples of stage one thinking. The answers are easily obtained and cited as evidence of the success of the government program.

But driving by a store or hotel in a TIF district and noticing a building or people working at jobs does not tell the entire story. Using the existence of a building, or the payment of taxes, or jobs created, is stage one thinking, and nothing more than that.

Fortunately, there are people who have thought beyond stage one, and some concerning local economic development and TIF districts. And what they’ve found should spur politicians and bureaucrats to find ways to move beyond stage one in their thinking.

An example are economists Richard F. Dye and David F. Merriman, who have studied tax increment financing extensively. Their article Tax Increment Financing: A Tool for Local Economic Development states in its conclusion:

TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.

So TIF districts are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:

If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.

We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.

In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.”

Here we have an example of thinking beyond stage one. The results are opposite of what one-stage thinking produces.

Some city council members are concerned about creating jobs, and are swayed by the promises of developers that their establishments will employ a certain number of workers. Again, this thinking stops at stage one. But others have looked farther, as has Paul F. Byrne of Washburn University. The title of his recent report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and in its abstract we find this conclusion regarding the impact of TIF on jobs:

Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.

While this research might be used to support a TIF district for industrial development, TIF in Wichita is primarily used for retail development. And, when thinking beyond stage one, the effect on employment — considering the entire city — is negative.

It’s hard to think beyond stage one. It requires considering not only the seen, but also the unseen, as Frederic Bastiat taught us in his famous parable of the broken window. But over and over we see how politicians at all levels of government stop thinking at stage one. This is one of the many reasons why we need to return as much decision-making as possible to the private sector, and drastically limit the powers of politicians and governments.

The odd ethics of Wichita Mayor Carl Brewer

The Wichita city council should repeal a law that the council doesn’t follow.

As he has done previously, Wichita Mayor Carl Brewer decided not to vote on a matter involving Spirit Aerosystems at the November 4, 2014 meeting of the Wichita City Council.

The mayor didn’t give a specific reason for recusing himself, but it’s probably because he was formerly an employee at Spirit. So it’s good that he did this. But if we’re going to observe ethics protocols like this — and we should — let’s go all the way. The mayor should have announced at the start of this agenda item that he had to recuse himself, and then he should have left the bench and probably also the council chambers. Instead, Brewer presided over the presentation and discussion of the item, and then stated he wouldn’t be voting. It’s a small matter, but we might as well do things right.

What is much more important — and equally difficult to understand — is this: Brewer feels he can’t vote on an item involving a company where he was an employee long ago, but he has no qualms about voting on matters that send taxpayer money to his fishing buddy, even through overpriced no-bid contracts.

Even more curious: Brewer thought it was ethical to vote to send taxpayer money to the movie theater owner who also sells his barbeque sauce.

Add this to the confusing mix of ethical judgments: The mayor feels he can’t shop for his personal automobile in Wichita because he doesn’t want to be accused of getting a “special deal,” in his words.

If someone can explain this line of reasoning by the mayor and/or the city, I’d appreciate being enlightened.

It’s good to know that Mayor Carl Brewer is concerned about ethical behavior when shopping for a car or voting on matters concerning his former employer. But I’m surprised, as this concern for virtue doesn’t match the behavior of the mayor and many members of the Wichita City Council. Shall we run down the list?

Exhibit 1: In August 2011 the Wichita City Council voted to award Key Construction a no-bid contract to build the parking garage that is part of the Ambassador Hotel project, now known as Block One. The no-bid cost of the garage was to be $6 million, according to a letter of intent. Later the city decided to place the contract for competitive bid. Key Construction won the bidding, but for a price $1.3 million less.

Wichita mayor Carl Brewer with major campaign donor Dave Wells of Key Construction.

The no-bid contract for the garage was just one of many subsidies and grants given to Key Construction and Dave Burk as part of the Ambassador Hotel project. Both of these parties are heavy campaign contributors to nearly all city council members. Brewer and the head of Key Construction are apparently friends, embarking on fishing expeditions.

What citizens need to know is that Brewer and the Wichita City Council were willing to spend an extra $1.3 million of taxpayer money to reward a politically-connected construction firm that makes heavy campaign contributions to council members. Only one council member, Michael O’Donnell, voted against this no-bid contract. At the time, no city bureaucrats expressed concern about this waste of taxpayer money.

Exhibit 2: In July 2012 Brewer participated in a decision to award the large contract for the construction of the new Wichita airport to Key Construction, despite the fact that Key was not the low bidder. The council was tasked to act in a quasi-judicial manner, to make decisions whether discretion was abused or whether laws were improperly applied. Brewer’s judgment was in favor of Key Construction, even though its bid had the same defect as the lower bid. This decision cost taxpayers and airport users an extra $2 million, to the benefit of a major campaign donor and fishing buddy.

Exhibit 3: In a Wichita Eagle story that reported on “city-financed downtown parking garages that spiraled well over budget” we learned this: “The most recent, the 2008 WaterWalk Place garage built by Key Construction, an original partner in the WaterWalk project, came in $1.5 million over budget at almost $8.5 million. That’s the biggest parking garage miss, according to figures from the city’s office of urban development, although the 2004 Old Town Cinema garage built by Key Construction came in almost $1 million over budget at $5.225 million.”

Despite this personal experience, Brewer wrote a letter recommending Key Construction (and only Key), observing “Key is known for their consistent quality construction, budget control and on schedule delivery.”

Exhibit 4: In 2008 the Wichita City Council approved a no- and low-interest loan to movie theater owner Bill Warren and his partners. Reported the Wichita Eagle: “Wichita taxpayers will give up as much as $1.2 million if the City Council approves a $6 million loan to bail out the troubled Old Town Warren Theatre this week. That’s because that $6 million, which would pay off the theater’s debt and make it the only fully digital movie theater in Kansas, would otherwise be invested and draw about 3 percent interest a year.”

Warren Theater Brewer's Best 2013-07-18

Warren’s theaters and other business ventures have received other financial benefits from the city under Brewer’s leadership, too. Then — and I swear I am not making this up — when Brewer started manufacturing and selling barbeque sauce, it was sold at Warren’s theaters.

Exhibit 5: Given all this, Mayor Brewer saw it fit to praise Wells and Burk at the city council meeting on December 16, 3014. Effusively praise the two, that is. Also, Bill Warren –the owner of the movie theater that sells the mayor’s barbeque sauce — is a partner in this apartment project.

Really. All this happened.

What can we say about a mayor who is concerned about the appearance of impropriety when voting on economic development incentives for his former employer, but is not able to understand the problems with his own behavior in office?

How can a person decide he must shop for a car outside the city, but votes for overpriced no-bid contracts for campaign contributors and friends?

Why would an elected official decline to vote on a tax break to his former employer, but votes to give millions to a campaign contributor, and then sells his barbeque sauce in that person’s business?

How can someone justify participating in a quasi-judicial hearing involving his campaign contributors and friend involving a large city contract?

It’s difficult to understand or reconcile these decisions.

We have a law, maybe

Presentation by city attorney to Wichita city council, November 2013.
Presentation by city attorney to Wichita city council, November 2013.
There is a law in Wichita. There is a city code that reads “[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.” Mayor Brewer voted for that law in 2008. But the former city attorney felt that council members did not need to follow that law.

When someone called attention to this law at a city council meeting when the mayor was about to award incentives to his fishing buddy, he threatened to sue the speaker. See Wichita Mayor Carl Brewer on public trust in government.

If the former city attorney’s interpretation of this law is correct and city council members do no need to follow this law, the city needs to do something. The council needs to repeal this section of the city code. There’s no need to have such a law if council members don’t have to obey. Also, someone who reads this — perhaps a business owner considering Wichita for expansion — might conclude that our city has a code of ethics that is observed by the mayor and council members and enforced by its attorneys. But giving that impression would be false.

WichitaLiberty.TV: The need for reform at Wichita City Hall

In this episode of WichitaLiberty.TV: An episode this week at the Wichita city council meeting highlights the need for campaign finance reform in Wichita. We’ll examine a few incidents and see if there’s a way we can reform Wichita city government so that it is capitalism friendly instead of crony friendly. View below, or click here to view at YouTube. Episode 69, broadcast December 21, 2014.

Campaign contribution stacking in Wichita

Those seeking favors from Wichita City Hall use campaign contribution stacking to bypass contribution limits. This has paid off handsomely for them, and has harmed everyone else.

Not long ago a person who is politically active wrote a letter that was published in the Wichita Eagle. It criticized the role of campaign contributions in federal elections, noting “Corporations don’t spend money on politics because they are patriotic; rather, the companies expect a financial return.” Later the letter held this: “Locally, I understand that elections for the Wichita City Council underwent ideal, nonpartisan campaign-finance reform years ago, and that these limits are scrupulously practiced.”

The writer is correct, but only superficially. Our campaign contribution limits for city and school board offices are relatively small. What we find, however, is that the cronies, that is, the people who want stuff from city hall, stack contributions using family members and employees.

Stacked campaign contributions received by James Clendenin from parties associated with Key Construction. Click for larger version.
Stacked campaign contributions received by James Clendenin from parties associated with Key Construction. Click for larger version.
Here’s how a handful of cronies stack campaign contributions. In 2012 council members James Clendenin (district 3, southeast and south Wichita) and Lavonta Williams (district 1, northeast Wichita) were preparing to run again for their offices in spring 2013. Except for $1.57 in unitemized contributions to Clendenin, two groups of related parties accounted for all contributions received by these two incumbents for an entire year. A group associated with Key Construction gave a total of $7,000 — $4,000 to Williams, and $3,000 to Clendenin. Another group of people associated with movie theater owner Bill Warren gave $5,000, all to Clendenin.

The casual observer wouldn’t realize this stacking of campaign contributions by looking at campaign finance reports. That’s because for city offices, the name of the company a contributor works for isn’t required. Industry and occupation are required, but these aren’t of much help. Further, contribution reports are not filed electronically, so the information is not easy to analyze. Some reports are even submitted using handwriting, and barely legible handwriting at that.

So it’s not easy to analyze campaign contributions for Wichita city offices. It takes a bit of effort to unpack the stacking. You have to see a name and investigate who that person is. When you do that, you might find that a man from Valley Center who list his occupation and industry as Manager and Aviation Subcontractor is married to someone who lists her occupation and industry as Director of Marketing. Investigating her reveals that she is an executive of Key Construction.

That company, Key Construction, is a prominent company in Wichita. It is an example of a company that seeks to earn outsized profits through the political system rather than by meeting customer needs in the market. Profits through cronyism, that is. Here’s an example. In August 2011 the Wichita city council voted to award Key Construction a no-bid contract to build the parking garage that is part of the Ambassador Hotel project, now known as Block One. The no-bid cost of the garage was to be $6 million, according to a letter of intent. Later the city decided to place the contract for competitive bid. Key Construction won the bidding, but for a price $1.3 million less.

Let me make sure you understand that. Mayor Carl Brewer, Lavonta Williams, and James Clendenin were willing to spend an extra $1.3 million of your tax money to reward their benefactors through a no-bid contract. Since then reforms have been implemented to prevent this. Hopefully the reforms will work. I am skeptical.

Wichita Mayor Carl Brewer with major campaign donor Dave Wells of Key Construction. Brewer has voted for no-bid contracts for Key.
Wichita Mayor Carl Brewer with major campaign donor Dave Wells of Key Construction. Brewer has voted for no-bid contracts for Key.
In 2012 there was another incident involving Key Construction that show the need for campaign finance reform. Key and another construction company were engaged in a dispute as to who should build the new Wichita airport. The city council was tasked to act in a quasi-judicial manner to decide the issue. Given all the campaign contributions Key was making at the time, and given the mayor’s well-known friendship with Dave Wells of Key Construction, can you guess who was awarded the contract? And can you guess whose contract was more expensive for taxpayers?

So back to the letter in the newspaper, which held: “Corporations don’t spend money on politics because they are patriotic; rather, the companies expect a financial return.” I’m not going to defend cronyism at the federal level. It exists and it is harmful. But I would like to let the writer of the letter know that cronyism also exists in Wichita city government. In fact, it may be worse in Wichita. At the federal level, Congress usually passes laws that benefit an entire industry — say the sugar industry or banks — to the detriment of consumers and taxpayers. (Sometimes the benefits are quite specific. American Enterprise Institute reports that the just-passed omnibus bill contains a section that provides protection from an Obamacare provision for exactly one entity: Blue Cross Blue Shield. Conservative writer Yuval Levin explained: “This section is, simply put, a special favor for Blue Cross/Blue Shield allowing them to count ‘quality improvement’ spending as part of the medical loss ratio calculation required of them under Obamacare. And it’s made retroactive for four years, saving them loads of money.”)

That’s bad enough. Here in Wichita, however, the cronyism is more concentrated and personal. The links between campaign contributions and handouts from city hall is much more direct. We should insist that the city council stop picking the pocket of your fellow man so it can give the proceeds to campaign contributors. Campaign finance reform can help.

In Wichita, not much notice of a public hearing

The City of Wichita gives little notice regarding a public hearing, which does not contribute to an open and transparent government that welcomes citizen involvement.

As part of its meeting on December 16, the Wichita City Council will consider issuing a letter of intent for industrial revenue bonds. Whether the bonds are a good or bad idea, the process the city has used in conducting the required public hearing is not contributing to an open and transparent government that welcomes citizen involvement.

The city's publication of notice of a public hearing
The city’s publication of notice of a public hearing, published in a most obscure location.
Kansas law requires that when cities or counties wish to issue industrial revenue bonds, there must be a public hearing (K.S.A. 12-1749d). Notice must be given.

The archives of The Wichita Eagle show that a legal publication was placed by the city on December 9 that gave notice of the December 16 item. But this notice, like most other legal notices, does not appear on the city’s website — a place where it would be much more useful. The city’s website is also where the city could make the notices available to citizens at very low cost to the city. The city’s website content is also available at no cost to citizens who already have internet access, unlike a subscription to The Wichita Eagle, although the Eagle advertisements are available to view without a subscription.

Here’s the problem that citizens face regarding the item on the December 16 agenda. For most people, the first awareness of this agenda item would have been on Friday December 12 at 2:33 pm. That’s when the agenda packet for this meeting was posted to the city’s website. If anyone had questions about the item, there is little time to resolve them between Friday afternoon and Tuesday morning. Of course, citizens could have inquired for details of the agenda item starting on December 9, when notice was published. But that would require inquiry to city officials, and it is not known if details were available at that time.

This is no way to hold a public hearing.

The city goes to great lengths to invite and solicit citizen involvement in city government. In the run-up to the recent sales tax election, the city continually reminded us of how many public meetings were held, how many surveys were filled out, and how we must come together as a community to solve our problems.

After the election Mayor Brewer started a press conference by, according to his published remarks, “thanking everyone who voted, participated in the community engagement process and took the time to learn about the sales tax proposal.” He also mentioned that the city would “expand and enhance our engagement process.”

But that’s not the case with this item. The notice that the city gave to citizens is deficient. Not legally deficient, but deficient if the city really wants citizens to be involved.

If the city is concerned about citizen involvement, the council should defer this item until next week or another future meeting.

Wichita seeks to correct an oversight, finally

A request to modify an agreement with the City of Wichita raises the question of why, finally, is the city dealing with an apparent oversight?

As I reported earlier this year:

Last year the Wichita City Council selected a development team to build apartments on the West Bank of the Arkansas River, between Douglas Avenue and Second Street. But city leaders may have overlooked a Wichita City Charter Ordinance that sets aside this land to be “open space, committed to use for the purpose of public recreation and enjoyment.”

Proposed apartments, west bank Arkansas River, Wichita
Proposed apartments, west bank Arkansas River, Wichita
This week the developers of the apartments seek city council approval of revisions to their plans. As part of the revision, city staff recommends that council approve a resolution that eliminates the restrictions on land use contained in Charter Ordinance No. 144. That ordinance provides that by a two-thirds vote of the council the restrictions may be reduced or eliminated.

A few questions come to mind.

Shall be hereafterFirst, Charter Ordinance No. 144, which the council may override, says that the property being used for the apartments “shall be hereafter restricted to and maintained as open space, committed to use for the purpose of public recreation and enjoyment.” Now that the council has turned over the property for private use, we may want to ask: Is this good public policy? The council will have to explicitly decide this issue. When the city conveyed the property without dealing with this ordinance, the issue was not discussed.

Second: Why only now is Charter Ordinance No. 144 and its restrictions being recognized? Why was this ordinance not recognized in August 2013 when the apartment project was approved by the city council? Part of the answer may be that the Wichita city attorney at that time has retired.

Third: If not for the request to modify the agreement would the conflict with Charter Ordinance No. 144 have been recognized? Would it have simply been ignored as an inconvenient rule that doesn’t really need to be followed, as it has been ignored for over one year?

This week, Wichita has a chance to increase government transparency

The Wichita City Council can decide to disclose how taxpayer money is spent, or let it remain being spent in secret.

The City of Wichita has three surrogate quasi-governmental agencies that are almost totally taxpayer-funded, specifically Go Wichita Convention and Visitors Bureau, Wichita Downtown Development Corporation, and Greater Wichita Economic Development Coalition. Each agency contends it is not a “public agency” as defined in Kansas law, and therefore does not have to fulfill records requests.

Go Wichita Convention and Visitors BureauThese agencies spend considerable sums of tax money. This week the city will consider funding Go Wichita with a budget of $2,356,851 for 2015. That is not all the taxpayer money this agency will spend, as earlier this year the council voted to increase the city’s hotel tax by 2.75 cents per dollar, with the proceeds going to Go Wichita. City documents indicate that tax is estimated to generate $2.3 million per year.

That is a lot of tax money, and also a high proportion of the agency’s total funding. According to the 2012 IRS form 990 for Go Wichita, the organization had total revenue of $2,609,545. Of that, $2,270,288 was tax money from the city. That’s 87 percent taxpayer-funded. When the surge of higher hotel tax money starts flowing in, that percent will undoubtedly rise, perhaps to 93 percent or more.

Despite being nearly totally funded by taxes, Go Wichita refuses to supply spending records. Many believe that the Kansas Open Records Act requires that it comply with such requests. If the same money was being spent directly by the city, the records undoubtedly would be supplied.

City of Wichita Spends 2 million Rebuffs Citizen’s Transparency RequestI’ve appeared before the council several times to ask that Go Wichita and similar organizations comply with the Kansas Open Records Act. See Go Wichita gets budget approved amid controversy over public accountability, City of Wichita Spends $2 million, Rebuffs Citizen’s Transparency Request, and articles at Open Records in Kansas.

The lack of transparency at Go Wichita is more problematic than this. Earlier this year Go Wichita refused to provide to me its contract with a California firm retained to help with the re-branding of Wichita. When the Wichita Eagle later asked for the contract, it too was refused. If the city had entered into such a contract, it would be a public record. Contracts like this are published each week in the agenda packet for city council meetings. But Go Wichita feels it does not have to comply with simple transparency principles.

The City of Wichita could easily place conditions on the money it gives to these groups, requiring them to show taxpayers how their tax dollars are being spent. But the City does not do this. This is not transparency.

In the past I’ve argued that Go Wichita is a public agency as defined in the Kansas Open Records Act. But the city disagreed. And astonishingly, the Sedgwick County District Attorney agreed with the city’s interpretation of the law.

So let’s talk about good public policy. Let’s recognize that even it is the case that the Kansas Open Records Act does not require Go Wichita, WDDC, and GWEDC to disclose records, the law does not prohibit or prevent them from fulfilling requests for the types of records I’ve asked for. Even if the Sedgwick County District Attorney says that Go Wichita is not required to release documents, the law does not prevent the release of these records.

Once we understand this, we’re left with these questions:

Why does Go Wichita want to keep secret how it spends taxpayer money, as much as $4.6 million next year?

Why is this city council satisfied with this lack of disclosure of how taxpayer funds are spent? Many council members have spoken of how transparency is important. One said: “We must continue to be responsive to you. Building on our belief that government at all levels belongs to the people. We must continue our efforts that expand citizen engagement. … And we must provide transparency in all that we do.” That was Mayor Brewer speaking in his 2011 State of the City address.

It would be a simple matter for the council to declare that the city and its taxpayer-funded partner agencies believe in open government. All the city has to have is the will to do this. It takes nothing more. It costs the city and its agencies nothing, because the open records law lets government charge for filling records requests. I would ask, however, that in the spirit of open transparent government, in respect for citizens’ right to know how tax funds are spent, and as a way to atone for past misdeeds, that Go Wichita fulfill records requests at no charge.

In Wichita, the need for campaign finance reform

Actions of the Wichita City Council have shown that campaign finance reform is needed. Citizen groups are investigating how to accomplish this needed reform, since the council has not shown interest in reforming itself.

Consider recent actions by the council and its members:

  • The council voted to give a movie theater operator a no-interest and low-interest loan, after having already received the benefit of tax increment financing.
  • A minister dabbling in real estate development made a large contribution to his council representative just before he asked the city council for tax increment financing.
  • The council voted to give a construction company a no-bid contract for a parking garage. When later put out for competitive bid, the same company won the contract, but with a bid 21 percent less costly to taxpayers.
  • Executives of a Michigan construction company made contributions to the campaign of a city council member just before and after the council voted to give the company and its local partner a huge construction contract.
  • When a group of frequent campaign contributors wanted to win a contest for the right to build an apartment project, the city’s reference-checking process was a sham. City and other government officials were listed as references without their knowledge or consent, and none of the people listed as references were actually contacted.
  • A frequent campaign contributor, according to the Wichita Eagle, “represented himself as an agent of the city — without the city ‘s knowledge or consent — to cut his taxes on publicly owned property he leases in the Old Town Cinema Plaza.” City officials expressed varying degrees of displeasure. But it wasn’t long before David Burk was receiving taxpayer subsidy again from the city council.
  • The council voted to grant $703,017 in sales tax forgiveness to frequent campaign contributors and the mayor’s fishing buddy.

Wichita Mayor Carl Brewer with major campaign donor Dave Wells of Key Construction.
Wichita Mayor Carl Brewer with major campaign donor Dave Wells of Key Construction. Brewer has voted to send millions to Key, including overpriced no-bid contracts.
What is the common thread running through these incidents? Council members have voted to enrich their significant campaign contributors. Each of these are examples of a “pay-to-play” environment created at Wichita City Hall. It’s harmful to our city in a number of ways.

First, overpriced no-bid contracts and other giveaways to campaign contributors isn’t economic development. It’s cronyism. It’s wasteful.

Second: Citizens become cynical when they feel there is a group of insiders who get whatever they want from city hall at the expense of taxpayers. At one time newspaper editorial pages crusaded against cronyism like this. But no longer in Wichita. The Wichita Eagle has reported on some of these issues — sometimes in depth, sometimes in passing, but some have escaped notice. The editorial page of the newspaper sometimes takes notice, but is rarely critical of the council or mayor.

Third, when it is apparent that a “pay-to-play” environment exists at Wichita City Hall, it creates a toxic and corrosive political and business environment. Companies are reluctant to expand into areas where they don’t have confidence in the integrity of local government. Will I find my company bidding against a company that made bigger campaign contributions than I did? If I don’t make the right campaign contributions, will I get my zoning approved? Will my building permits be slow-walked through the approval process? Will my projects face unwarranted and harsh inspections? Will my bids be subjected to microscopic scrutiny?

Importantly: Will the Wichita city council prop up a competitor to my company with economic development incentives that place my company at severe disadvantage?

Wichita's mayor sells his barbeque sauce at movite theaters owned by a campaign contributor who receives city taxpayer subsidies.
Wichita’s mayor sells his barbeque sauce at movite theaters owned by a campaign contributor who receives city taxpayer subsidies.
We need laws to prohibit Wichita city council members from voting on or advocating for decisions that enrich their significant campaign contributors. A model law for Wichita is a charter provision of the city of Santa Ana, in Orange County, California, which states: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”

We’d also need to add — as does New Jersey law — provisions that contributions from a business owner’s spouse and children will be deemed to be from the business itself. This is because for Kansas municipal and school district elections, only personal contributions may be made. Additionally the contributions of principals, partners, officers, and directors, and their spouses and children, are considered to be from the business itself for purposes of the law. These provisions are important, as many city council members in Wichita receive campaign contributions from business owners’ family members and employees as a way to skirt our relatively small contribution limits. For two examples of how companies use family members, employees, and friends to stack up campaign contributions, see Campaign contributions show need for reform in Wichita.

Such campaign finance reform would not prohibit anyone from donating as much as they want (up to the current limits) to any candidate. Nor would the law prevent candidates from accepting campaign contributions from anyone.

This reform, however, would remove the linkage between significant contributions and voting to give money to the contributor. This would be a big step forward for Wichita, its government, and its citizens.

Proponents see three paths towards campaign finance reform. One would be to press for a law in the upcoming session of the Kansas Legislature. Such a law would be statewide in scope, and could apply to city councils, county commissions, school boards, townships, and other elective bodies.

A second path would be to use the municipal initiative process. Under this process, a group writes a proposed ordinance. Then, it collects valid signatures on petitions. If a successful petition is verified, the city council must either (a) pass the ordinance as written, or (b) set an election to let the people vote whether the ordinance should become law.

There is also a third path, which is for the Wichita City Council to recognize the desirability of campaign finance reform and pass such an ordinance on its own initiative.

If we take the affected parties at their word, this third path should face little resistance. That’s because politicians who accept these campaign contributions say it doesn’t affect their voting, and those who give the contributions say they don’t do it to influence votes.

If politicians and contributors really mean what they say, there should be no opposition to such a law. Citizens should ask the Wichita City Council to pass a campaign finance reform ordinance that prohibits voting to enrich significant campaign contributors.

Some incidents

warren-bailout-poses-dilemmaIn 2008 the Wichita City Council approved a no- and low-interest loan to Bill Warren and his partners. Reported the Wichita Eagle: “Wichita taxpayers will give up as much as $1.2 million if the City Council approves a $6 million loan to bail out the troubled Old Town Warren Theatre this week. That’s because that $6 million, which would pay off the theater’s debt and make it the only fully digital movie theater in Kansas, would otherwise be invested and draw about 3 percent interest a year.”

When questioned about election donations:

“I would never do anything because of a campaign contribution,” said [former council member Sharon] Fearey, who received $500 from David Burk and $500 from David Wells.

“I don’t think $500 buys a vote,” said [former council member Sue] Schlapp.

“One has nothing to do with the other,” [Wichita Mayor Carl] Brewer said.

Also in 2008, the Reverend Dr. Kevass J. Harding wanted to spruce up the Ken-Mar shopping center at 13th and Oliver, now known as Providence Square. Near the end of June, Kevass Harding and his wife contributed a total of $1,000, the maximum allowed by law, to the campaign of Wichita City Council Member Lavonta Williams (district 1, northeast Wichita). This was right before Harding appeared before the city council in July and August as an applicant for tax increment district financing (TIF).

These campaign contributions, made in the maximum amount allowable, were out of character for the Hardings. They had made very few contributions to political candidates, and they appear not to have made many since then.

Campaign contributions to Wichita City Council member Lavonta Williams from an applicant for tax increment financing.
Campaign contributions to Wichita City Council member Lavonta Williams from an applicant for tax increment financing.

But just before the Ken-Mar TIF district was to be considered for approval, the Hardings made large contributions to Williams, who is the council member representing Ken-Mar’s district. Harding would not explain why he made the contributions. Williams offered a vague and general explanation that had no substantive meaning.

In August 2011 the council voted to award Key Construction a no-bid contract to build the parking garage that is part of the Ambassador Hotel project, now known as Block One. The no-bid cost of the garage was to be $6 million, according to a letter of intent. Later the city decided to place the contract for competitive bid. Key Construction won the bidding, but for a price $1.3 million less.

The no-bid contract for the garage was just one of many subsidies and grants given to Key Construction and Dave Burk as part of the Ambassador Hotel project. In Wichita city elections, individuals may contribute up to $500 to candidates, once during the primary election and again during the general election. As you can see in this table compiled from Wichita City Council campaign finance reports, spouses often contribute as well. So it’s not uncommon to see the David and DJ Burk family contribute $2,000 to a candidate for their primary and general election campaigns. That’s a significant sum for a city council district election campaign cycle. Click here for a compilation of campaign contributions made by those associated with the Ambassador Hotel project.

Council Member Jeff Longwell (district 5, west and northwest Wichita), in his second term as council member, led the pack in accepting campaign contributions from parties associated with the Ambassador Hotel project. For his most recent election, he received $4,000 from parties associated with Key Construction, and $2,000 from David Burk and his wife. Total from parties associated with the Ambassador Hotel project: $6,000. When Longwell ran for Sedgwick County Commission this summer, these parties donated generously to that campaign, too.

Council Member Lavonta Williams (district 1, northeast Wichita) received $5,000 from parties associated with the Ambassador Hotel: $3,000 from parties associated with Key Construction, and $2,000 from David Burk and his wife.

Wichita Mayor Carl Brewer received $5,000 from parties associated with the Ambassador Hotel: $4,500 from parties associated with Key Construction, and $500 DJ Burk, David Burk’s wife.

Council Member and Vice Mayor Janet Miller (district 6, north central Wichita) received $3,500 during her 2009 election campaign from parties associated with the Ambassador Hotel: $1,500 from parties associated with Key Construction, and $2,000 from David Burk and his wife.

For his 2011 election campaign, Council Member Pete Meitzner (district 2, east Wichita) received $3,500 from parties associated with the Ambassador Hotel: $2,500 from parties associated with Key Construction, and $1,000 from David Burk and his wife.

For his 2011 election campaign, Council Member James Clendenin (district 3, southeast and south Wichita) received $1,500 from parties associated with the Ambassador Hotel: $1,000 from parties associated with Key Construction, and $500 from David Burk and his wife.

In 2011 nearly all council members approved a no-bid contract for this garage. It was later re-bid at a much lower price.
In 2011 nearly all council members approved a no-bid contract for this garage. It was later re-bid at a much lower price.
What citizens need to know is that the Wichita City Council was willing to spend an extra $1.3 million of taxpayer money to reward a politically-connected construction firm that makes heavy campaign contributions to council members. Only one council member, Michael O’Donnell, voted against this no-bid contract. No city bureaucrats expressed concern about this waste of taxpayer money.

Of interest to current mayoral politics: In 2012 while Jeff Longwell was campaigning for the Sedgwick County Commission, campaign contributions from parties associated with Walbridge, a Michigan-based construction company appeared on Longwell’s campaign finance reports. Why would those in Michigan have an interest in helping a Wichita City Council member fund his campaign for a county office? Would the fact that Walbridge is a partner with Key Construction on the new Wichita Airport terminal provide a clue?

Michigan contractors headline 500These contributions are of interest because on July 17, 2012, the Wichita City Council, sitting in a quasi-judicial capacity, made a decision in favor of Key and Walbridge that will cost some group of taxpayers or airport customers an extra $2.1 million. Five council members, including Longwell, voted in favor of this decision. Two members were opposed.

On July 16 — the day before the Wichita City Council heard the appeal that resulted in Key Construction apparently winning the airport contract — John Rakolta, Chairman and Chief Executive Officer of Walbridge and his wife contributed $1,000 to Longwell’s campaign for Sedgwick county commissioner.

Jeff Longwell vote to help Michigan CompanyThen on July 20, three days after the council’s decision in favor of Key/Walbridge, other Walbridge executives contributed $2,250 to Longwell’s campaign. Besides the Walbridge contributions, Key Construction and its executives contributed $6,500 to Longwell’s county commission campaign. Key and its executives have been heavy contributors to Longwell’s other campaigns, as well as to Wichita Mayor Carl Brewer and many other Wichita City Council members.

Will the next Wichita mayor advocate enforcing our ethics laws?

Wichita has laws that seem clear. But the city attorney said they don’t mean what they seem to say. Will our next mayor stand up for ethics?

Wichita has a city code that seems to give guidance to council members (the mayor is a council member) on ethical behavior. The code says, in part, “[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.”

But Mayor Carl Brewer and many council members have done just that. Many times, in fact. And the Wichita city attorney said that the city code doesn’t really need to be followed.

Be advised: If you ask the mayor to adhere to this law, he may threaten to sue you.

Following, from July 2013, what Wichita city code says and what the city attorney said about that law. We have a new city attorney this year, so maybe things will change. But I have a feeling that change must be started from the top, which is the mayor. The city attorney, indirectly, works for the mayor and council.

Wichita city code seemingly ignored

When a city has laws that it doesn’t enforce, what are citizens to do?

City of Wichita logoHere’s a section from the Wichita city code as passed in 2008 (full section below):

“[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.”

When asked about a specific application of this city law, the Wichita city attorney supplied this interpretation:

Related to the Mayor’s participation in the item, yes, City Code advises Council members to “refrain from making decisions involving business associates, customers, clients, friends and competitors. … ” but the Code does not provide definitions or limits to these broad categories of constituents. Further, the City Code clearly requires Council members to “vote on all matters coming before the City Council except in those particular cases of conflict of interest. …” The city Code does not define what constitutes a conflict but the Council has historically applied the State law for that definition.

Applying that State law specific to local municipalities, the Mayor does not have any substantial interest in Douglas Place LLC, and therefore no conflict. Under the State ethics law, there was no requirement that the Mayor recuse himself from voting on the Ambassador Project.

So we have statutory language that reads “shall refrain,” but the city attorney interprets that to mean “advises.”

We also have statutory language that reads “business associates, customers, clients, friends and competitors.” But the city attorney feels that these terms are not defined, and therefore the mayor and city council members need not be concerned about compliance with this law.

I wonder whose interests the city attorney represents. The people of Wichita, who want to be governed in a fair and ethical manner? It doesn’t seem so.

If the city attorney’s interpretation of this law is controlling, I suggest we strike this section from the city code. Someone who reads this — perhaps a business owner considering Wichita for expansion — might conclude that our city has a code of ethics that is observed by the mayor and council members and enforced by its attorneys.

Giving that impression, though, would be false — and unethical.

Here’s the Wichita city code:

Sec. 2.04.050. — Code of ethics for council members.

Council members occupy positions of public trust. All business transactions of such elected officials dealing in any manner with public funds, either directly or indirectly, must be subject to the scrutiny of public opinion both as to the legality and to the propriety of such transactions. In addition to the matters of pecuniary interest, council members shall refrain from making use of special knowledge or information before it is made available to the general public; shall refrain from making decisions involving business associates, customers, clients, friends and competitors; shall refrain from repeated and continued violation of city council rules; shall refrain from appointing immediate family members, business associates, clients or employees to municipal boards and commissions; shall refrain from influencing the employment of municipal employees; shall refrain from requesting the fixing of traffic tickets and all other municipal code citations; shall refrain from seeking the employment of immediate family members in any municipal operation; shall refrain from using their influence as members of the governing body in attempts to secure contracts, zoning or other favorable municipal action for friends, customers, clients, immediate family members or business associates; and shall comply with all lawful actions, directives and orders of duly constituted municipal officials as such may be issued in the normal and lawful discharge of the duties of these municipal officials.

Council members shall conduct themselves so as to bring credit upon the city as a whole and so as to set an example of good ethical conduct for all citizens of the community. Council members shall bear in mind at all times their responsibility to the entire electorate, and shall refrain from actions benefiting special groups at the expense of the city as a whole and shall do everything in their power to ensure equal and impartial law enforcement throughout the city at large without respect to race, creed, color or the economic or the social position of individual citizens.

Evaluating economic development incentives

The evaluation of economic development incentives requires thinking at the margin, not the entirety.

When considering the effect of economic development incentives, cities like Wichita use a benefit-cost analysis to determine whether the incentive is in the best interests of the city. The analysis usually also considers the county, state, and school districts, although these jurisdictions have no say over whether the incentive is granted, with a few exceptions. The idea is that by paying money now or forgiving future taxes, the city gains even more in increased tax collections. This is then pitched as a good deal for taxpayers: The city gets more jobs (usually) and a profit, too.

Economic activity usually generates tax revenue that flows to governmental agencies. When people work, they pay income taxes. When they buy stuff, they pay sales taxes. When they create new property, it is taxed. This happens whether or not the economic activity is a result of government incentive.

When calculating benefit-cost ratios, government takes credit for the increase in tax revenue from a company receiving economic development incentives. Government often says that without the incentive, the company would not have located in Wichita. Or, without the incentive, it would not have expanded in Wichita. Now, it is claimed that incentives are necessary to persuade companies to consider remaining in Wichita rather than moving somewhere else.

But there are a few problems with the arguments that cities and their economic development agencies promote. One is that the increase in tax revenue happens regardless of whether the company has received incentives. What about all the companies that locate to or expand in Wichita without receiving incentives? How do we calculate the benefit-cost ratio when a company receives no incentives? The answer is it can’t be calculated, as there is no government cost. Instead, there is only benefit.

Then, we don’t often ask why do some companies need incentives, and others do not? Do the companies that receive incentives really need them? Why do some companies receive incentives multiple times?

Related is that jurisdictions may grant relatively small incentives and then take credit for the entire deal. I’ve been told that when economic development agencies learn of a company moving to an area or expanding their Wichita operations, they swoop in with small incentives and take credit for the entire deal. The agency is then able to point to a small incentive and take credit for the entire deal. As you can imagine, it’s difficult to get the involved parties to speak on the record about this.

Further, governments may not credit the contribution of other governments. In the past when the Wichita economic development office presented information about an incentive it proposed to offer to a company, it would sometimes list the incentives the company is receiving from other governments. As an example, when the city offered incentives to NetApp in 2012, the city’s contribution was given as a maximum of $418,000. The agenda material mentioned — obliquely — that the State of Kansas was involved in the incentive package. Inquiry to the Kansas Department of Commerce revealed that the state had promoted incentives worth $35,160,017 to NetApp. Wichita’s incentive contribution is just 1.2 percent of what the state offered, which makes us wonder if the Wichita incentive was truly needed.

The importance of marginal thinking

When evaluating economic development incentives, we often fail to properly evaluate the marginal gains. Here’s an example of the importance of looking at marginal gains rather than the whole. In 2012, the City of Wichita developed a program called New HOME (New Home Ownership Made Easy). The crux of the program is to rebate Wichita city property taxes for five years to those who buy newly-built homes in certain neighborhoods under certain conditions.

Wichita City HallThe important question is how much new activity this program will induce. Often government takes credit for all economic activity that takes place. This ignores the economic activity that was going to take place naturally — in this case, new homes that are going to be built even without this subsidy program. According to data compiled by Wichita Area Builders Association and the WSU Center for Economic Development and Business Research — this is the data that was current at the time the Wichita city council made its decision to authorize the program — in 2011 462 new homes were started in the City of Wichita. The HOME program contemplated subsidizing 1,000 homes in a period of 22 months. That’s a rate of 545 homes per year — not much more than the present rate of 462 per year. But, the city has to give up collecting property tax on all these homes — even the ones that would be built anyway.

What we’re talking about is possibly inducing a small amount of additional activity over what would happen naturally and organically. But we have to subsidize a very large number of houses in order to achieve that. The lesson is that we need to evaluate the costs of this program based on the marginal activity it may induce, not all activity. For more, see Wichita new home tax rebate program: The analysis.

WichitaLiberty.TV: A downtown parking garage deal, academic freedom attacked at KU, and classical liberalism

In this episode of WichitaLiberty.TV: While chair of the Wichita Metro Chamber of Commerce, a Wichita business leader strikes a deal that’s costly for taxpayers. A Kansas University faculty member is under attack from groups that don’t like his politics. Then, how can classical liberalism help us all get along with each other? View below, or click here to view at YouTube. Episode 68, broadcast December 14, 2014.

Why is this man smiling?

In Wichita, the chair of the Wichita Metro Chamber of Commerce crafts a sweetheart deal for his company to the detriment of Wichita taxpayers.

In November 2013 the Wichita City Council granted an exemption from paying property and sales tax for High Touch Technologies, a company located in downtown Wichita. This item was of more than usual interest as the company’s CEO, Wayne Chambers, is now chair of the Wichita Metro Chamber of Commerce.

High Touch Technologies in downtown Wichita, with sign calling for higher sales tax.
High Touch Technologies in downtown Wichita, with sign calling for higher sales tax.
At the same time the city council voted to rent to High Touch up to 180 parking stalls at monthly rent of $35. These are located in the garage at 215 S. Market. The condition of the garage had deteriorated so much that it had been closed. In March 2014 the city council decided to rehabilitate the garage. According to city documents, the cost to rehabilitate the garage is $9,685,000, which creates 550 parking stalls. This is a cost per stall of $17,609.

A question is this: Who was the biggest beneficiary of this transaction: High Touch and its owners, or city taxpayers?

To evaluate real estate investments, a common metric is capitalization rate. The formula is

capitalization rate = annual net operating income / cost (or value)

In its coverage of the rehab of the garage, the Wichita Eagle didn't let taxpayers know how much High Touch benefited from their contributions.
In its coverage of the rehab of the garage, the Wichita Eagle didn’t let taxpayers know how much High Touch benefited from their contributions.
For a parking stall in this garage as rented to High Touch, the capitalization rate is

($35 per stall per month * 12 months per year) / $17,609 cost = 2.4 percent

How do we place this number in context? Is this a good or bad deal for taxpayers? To answer this question, we need to find an appropriate capitalization rate. In major cities the capitalization rate for parking garages is lower than for other types of real estate, perhaps five percent. Local sources say the rate in Wichita for parking garages could be seven or eight percent, but there are no recent parking lot transactions to help gauge what the market wants for a capitalization rate. Taxpayers may remember when the city evaluated the Union Station project in October, part of which is a parking garage, the city used a capitalization rate of nine percent. That’s the capitalization rate the city felt the investor deserved to earn, and the city used that rate to justify taxpayer subsidy.

But on the 215 S. Market garage the city, on behalf of taxpayers, accepted a cap rate of just 2.4 percent.

What if the city wanted to earn a capitalization rate of nine percent for taxpayers? The annual rent for each parking stall would have to be $1,585, or $132 per month. At seven percent capitalization rate, the monthly rent would be $103.

But the city is renting the spaces for just $35, not $132 or $103.

View from parking garage, 215 S. Market, August 2009
View from parking garage, 215 S. Market, August 2009
It’s actually a better deal for High Touch — and a correspondingly worse deal for city taxpayers — than these numbers show. If High Touch was to build a parking garage itself, it would encounter expenses such as insurance, lighting, cleaning and sweeping, repairs and maintenance, and security. Not to mention taxes, which the city does not pay. But the city will pay these other expenses, except for insurance, as the city self-insures. That has an implicit cost that taxpayers bear.

All of these costs are contained in the $35 monthly rent the city will collect from High Touch. It’s a great deal for High Touch, and a bad deal for city taxpayers. It also establishes a template whereby private sector developers are unlikely to develop parking in downtown Wichita when there is a competitor that can undercut their rates, using taxpayer dollars to do so.

Taxpayers might remember that the biggest subsidy for High Touch — the property and sales tax breaks — started when the company CEO dropped hints that the company might add jobs elsewhere than Wichita. Chambers told the Wichita Business Journal that he considered moving the office to another city. All this happened while he was working his way up the leadership ladder to become chair of the Wichita Chamber.

Options for funding Wichita’s future water supply

Now that the proposed Wichita sales tax has failed, how should Wichita pay for a future water supply?

At the December 2 meeting of the Wichita city council, discussion by Council member Pete Meitzner (district 2, east Wichita) referred to the recent election in which Wichita voters rejected a proposed sales tax. (Video below, or click here to view at YouTube.) The major portion of the tax, $250 million collected over five years, would have been used to expand the ASR system as a way of providing for Wichita’s future water needs.

One of the arguments advanced by opponents of the sales tax such as myself is that water users should pay for future water supply. Advocates of the sales tax disagreed, arguing that Wichitans and visitors should pay higher sales taxes to fund a new water supply.

What does the arithmetic look like if we pay for a water supply though water bills? (Some use the term rates.) First, let’s set aside the questions of when the city needs an expanded water supply and how that water should be supplied.

Meitzner’s questioning of city public works director Alan King elicited how many water meters or accounts the water department has, which King said is almost 140,000. Meitzner then proceeded to ask if the cost of a new water supply — $250 million — was born equally by each of these customers, how much would that add to water bills? King said it would be in the range of “23, almost 24 dollars per bill, and at the high end something closer to 30 dollars per bill. That would be each month, you would have to pay that for 60 months.”

Meitzner then ran through computations that resulted in a cost of $1,500 per meter over five years to pay for the cost of a new water supply. He then compared that to sales tax opponents who said that the cost of the additional sales tax per family would be $160 per year. Meitzner said that would be an additional cost of $800 over five years to pay for everything the proposed sales tax was dedicated to, not just a new water supply.

The line of reasoning followed by Meitzner is superficially appealing but economically unsound. It is true that water bills would have to rise by quite a bit in order to raise $250 million over five years. But it seems unlikely that the city would decide to spread that cost equally among its water customers. Would the city ask its largest industrial customers to contribute the same amount each month as small households that do no outside irrigation? I don’t think that most people would think this is reasonable. But Meitzner’s arithmetic implies that the city would, or could, do exactly this.

There are many ways the city could apportion the cost of a new water supply among water users. First, the city could simply raise the price of a gallon of water. That would let water users participate in the funding of a new water supply in proportion to the amount of water they use.

Second, the city could add a fixed amount to each water bill, that money reserved for a future water supply. The city already has a fixed cost for water service. It’s referred to in the rate ordinance as the “minimum monthly” charge. It varies from $11.95 per month for the smallest hookups to $478.78 per month for the largest wholesale users. This amount could be increased by equal portion — say ten percent — for everyone. Or, if the city wants to reduce the burden on small households, it could leave the rate for small hookups as it is, and raise it for larger hookups.

Third, the city could decide to raise the price of a gallon of water by different amounts for different classes of water users. Wichita, like many cities, use a tiered structure of rates that separates summer irrigation water usage from household usage inside the home. How does Wichita’s tiered structure of rates compare to other cities? A recent Black & Veatch survey found for that the 50 cities in the survey, considering only the water portion of bills, the average cost for using 3,750 gallons per month is $19. For using 15,000 gallons, the cost is $65. That’s a ratio of 3.4 to 1. For Wichita, the survey reported costs of $18 and $36, for a ratio of 2.0 to 1.

These are two important numbers: 3.4 and 2.0. They mean that while the price per gallon of Wichita water becomes marginally more expensive as more water is used, the slope is as steep as the average. It means that Wichita households that use low amounts of water pay about average rates, but those Wichita households using a lot of water pay rates much less than average. This is something the city could easily adjust. It would also have the benefit of encouraging conservation, which is something the city says is important for our future.

We need to be aware of the cost of water

Wichita proposed sales tax explanation on waterIt’s important to have water users pay for a new water supply. The benefit is that water users will become acutely aware of the costs of a new water supply. That awareness is difficult to achieve. Many citizens are surprised to learn that the city has spent $247 million over the past decade on a water project, the ASR program. Nearly all that was paid by using long-term debt, the same type of debt that the city urged citizens to avoid during the sales tax campaign.

Paying for a new water supply through water bills would let commercial and industrial users participate in paying the cost of the project. These water users usually don’t pay a lot of sales tax. A restaurant, for example, does not pay sales tax on the food ingredients it purchases. An aircraft manufacturer does not pay sales tax on the raw materials and component parts it buys. But these companies have a water bill. Yet, the city recommended that low income households pay more sales tax on their groceries. The city said this is the best way to pay for a new water supply to protect our lawns and golf courses during a drought.

In Wichita, a campaign issue to watch for

As Wichita enters campaign season for mayor and city council, will any candidates call for implementing a reform that we desperately need in Wichita? Following, from 2012, explains.

In the wake of scandals some states and cities have passed “pay-to-play” laws. These laws may prohibit political campaign contributions by those who seek government contracts, prohibit officeholders from voting on laws that will benefit their campaign donors, or the laws may impose special disclosure requirements.

Many people make campaign contributions to candidates whose ideals and goals they share. This is an important part of our political process. But when reading campaign finance reports for members of the Wichita City Council, one sees the same names appearing over and over, often making the maximum allowed contribution to candidates.

And when one looks at the candidates these people contribute to, you notice that often there’s no common thread linking the political goals and ideals of the candidates. Some people contribute equally to liberal and conservative council members. But then, when these people appear in the news after having received money from the Wichita City Council, it snaps into place: These campaign donors are not donating to those whose political ideals they agree with. Instead, they’re donating so they can line their own pockets. These donors are opportunists.

An architect makes big contributions supporting a school bond issue campaign, and then wins a no-bid contract. Coincidence?
An architect makes big contributions supporting a school bond issue campaign, and then wins a no-bid contract. Coincidence?
As another example, for the 2008 campaign for a bond issue for USD 259 (Wichita public school district), my analysis found that 72 percent of the contributions, both in-kind and cash, was given by contractors, architects, engineering firms, and others who directly stand to benefit from school construction. Do these companies have an especially keen interest in the education of children? I don’t think so. They are interested in themselves.

Some states and cities have taken steps to reduce this harmful practice. New Jersey is notable for its Local Unit Pay-To-Play Law. The law affects many local units of government and the awarding of contracts having a value of over $17,500, requiring that these contracts be awarded by a “fair and open process,” which basically means a contract process open to bidding.

Cities, too, are passing pay-to-pay laws. Notably, a recently-passed law in Dallas was in response to special treatment for real estate developers — the very issue Wichita is facing now as it prepares to pour millions into the pockets of a small group of favored — and highly subsidized — downtown developers who are generous with campaign contributions to almost all council members. Not that this is new to Wichita, as the city has often done this in the past.

Smaller cities, too, have these laws. A charter provision of the city of Santa Ana, in Orange County, California, states: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”

But Kansas has no such law. Certainly Wichita does not, where pay-to-play is seen by many citizens as a way of life.

In 2011 nearly all council members approved a no-bid contract for this garage. It was later re-bid at a much lower price.
In 2011 nearly all council members approved a no-bid contract for this garage. It was later re-bid at a much lower price.
In Kansas, campaign finance reports are filed by candidates and available to citizens. But many politicians don’t want campaign contributions discussed, at least in public. Recently Wichita Council Member Michael O’Donnell expressed concern over the potential award of a $6 million construction contract without an open bidding process. The contractor the city wanted to give the contract to was Key Construction, a firm that actively makes political contributions to city council members, both conservative and liberal.

For expressing his concern, O’Donnell was roundly criticized by many council members, and especially by Mayor Carl Brewer.

Here’s what’s interesting: Brewer and city council members say the campaign contributions don’t affect their votes. Those who regularly make contributions say they don’t do it to influence the council. Therefore, it seems that there should be no opposition to a pay-to-play law in Wichita — or the entire state — like the one in Santa Ana.

But until we get such a law, I can understand how Wichita city council members don’t want to discuss their campaign contributions from those they’re about to vote to give money to. It’s not about supporting political ideologies — liberal, moderate, or conservative. It’s about opportunists seeking money from government.

The practice stinks. It causes citizens to be cynical of their government and withdraw from participation in civic affairs. It causes government to grow at the expense of taxpayers. Pay-to-play laws can help reverse these trends.

You may download a printable copy of this article at Kansas Needs Pay-to-Play Laws.

WichitaLiberty.TV: Wichita’s legislative agenda, and a bit of bad news

In this episode of WichitaLiberty.TV: A look at some elements of Wichita’s legislative agenda for state government, in particular special tax treatment for special artists, problems with the city’s numbers regarding airfares, and why we should abandon the pursuit of passenger rail. Then, why are people not more involved in political affairs? View below, or click here to view at YouTube. Episode 67, broadcast December 7, 2014.