Tag Archives: Wichita city government

Kansas should adapt statewide law to Wichita’s

An initiative passed in Wichita calls for reduced penalties for possession of marijuana, but is in conflict with Kansas state law. There is a simple solution.

On April 7, 2015 Wichita voters passed a ballot initiative that reduces the penalties for possession of small amounts of marijuana. The proposed — pending — Wichita law removes the threat of jail, and allows for expunging the record of the violation.

Current news and debate focuses on the conflict between the Wichita ordinance and state law, with the Kansas Attorney General filing a lawsuit asking the Kansas Supreme Court to block implementation of the law Wichita voters approved.1

There is a simple solution, and one that could be implemented quickly. The Kansas Legislature should change state law to allow for the will of Wichita voters to be expressed. The legislature might do this in a number of ways. It might use the Wichita ordinance as a model for a similar law that would apply statewide. Or, it could write a law that allows the proposed Wichita ordinance to coexist with state law. There may be other solutions.

Either way, Kansas law needs reform. The law regarding marijuana in Kansas is an example of overcriminalization, that is, of laws we don’t need, or laws that cause more harm than good. In January Charles G. Koch and Mark V. Holden of Koch Industries, Inc. wrote an op-ed published in Politico titled The Overcriminalization of America: How to reduce poverty and improve race relations by rethinking our justice system.2 They explain the nature and scope of the problem:

Overcriminalization has led to the mass incarceration of those ensnared by our criminal justice system, even though such imprisonment does not always enhance public safety. Indeed, more than half of federal inmates are nonviolent drug offenders. Enforcing so many victimless crimes inevitably leads to conflict between our citizens and law enforcement.

The proposed Wichita ordinance fits into this category. It reduces the penalties for possession of small amounts of marijuana, removing the threat of jail. No matter one’s feelings regarding the use of marijuana, it is a victimless crime. This is especially true for those who use — or would like to use, but for fear of breaking the law — marijuana for medicinal purposes.

In addition to the societal aspect of victimless crimes, Koch and Holden explain the economic factor:

Reversing overcriminalization and mass incarceration will improve societal well-being in many respects, most notably by decreasing poverty. Today, approximately 50 million people (about 14 percent of the population) are at or below the U.S. poverty rate. Fixing our criminal system could reduce the overall poverty rate as much as 30 percent, dramatically improving the quality of life throughout society — especially for the disadvantaged.

We in Kansas have an opportunity to improve both our economy and social environment at the same time.

In a few weeks the Kansas Legislature will reconvene. There is still important business to conduct, such as passing a budget. But there will be time to consider and pass a law that would allow the will of Wichita voters to be implemented. Passing such a law doesn’t mean that legislators recommend or approve of marijuana. It simply means that they recognize a victimless crime for what it is, and in the process make Kansas a more tolerant and welcoming state.

  1. The Daily Chronic
    Kansas AG asks Supreme Court to Review Wichita Marijuana Ordinance
    The Daily Chronic,. 2015. ‘Kansas AG Asks Supreme Court To Review Wichita Marijuana Ordinance’. Accessed April 13 2015. http://www.thedailychronic.net/2015/42204/kansas-ag-asks-supreme-court-review-wichita-marijuana-ordinance/.
  2. KRUSE, M.
    The Overcriminalization of America
    KRUSE, MICHAEL. 2015. ‘The Overcriminalization Of America’. POLITICO Magazine. Accessed April 13 2015. http://www.politico.com/magazine/story/2015/01/overcriminalization-of-america-113991.html.

Wichita marijuana ballot issue, April 7, 2015

Following is a map of voting for the Wichita marijuana ballot issue, April 7, 2015. A vote of “Yes” was in favor of reducing the penalty for possession. View below, or click here to open in a new window or mobile device. Click or tap on a precinct to view data.

For a tabular presentation of this data and other Wichita election returns, click here. 37,166 votes were cast for the marijuana ballot measure, and 37,190 votes were cast for mayor.

Someone also asked if there was a correlation between the marijuana vote and the mayoral vote. A plot of the two is below. With R = .01, there is no correlation to speak of.

Longwell - marijuana plot 2015-04-07

Figeac Aero economic development incentives

Wichita politicians, economic development officials, and civic leaders bemoan the lack of incentives Wichita can offer. A deal under consideration illustrates what is really available.

Next week the Wichita City Council will consider a forgivable loan to Figeac Aero North America related to its expansion of its Wichita facility. Following is an explanation of the various incentives and benefits planned for this company.

Figeac will receive forgivable loans of $250,000 each from Sedgwick County and the City of Wichita, with the State of Kansas adding $500,00, although it is not clear if that is a grant or forgivable loan.

City documents don’t mention this, but a letter from the Kansas Department of Commerce indicates that Figeac will benefit from the Promoting Employment Across Kansas program, commonly known as PEAK. This program rebates 95 percent of the state withholding taxes back to the company. An investigation from earlier this year showed that PEAK incentive payments can be a substantial sum. Tables available at the Kansas Department of Revenue indicate that for a single person with no exemptions who earns $40,000 annually, the withholding would be $27 per week (for weekly payroll), or $1,404 annually. For a married person with two children earning the same salary, withholding would be $676 annually. Under PEAK, the company retains 95 percent of these values.

Briefcase with moneyWe don’t know how much withholding tax Figeac employees will generate. An estimate is that with 200 employees earning $40,000, averaging the two withholding scenarios illustrated above, Figeac would receive $1040 * 200 * 95% = $191,900 per year in PEAK payments.

The Department of Commerce also offers tax credits through the High Performance Incentive Program (HPIP). This rebates, in the form of tax credits, 10% of the capital investment above $1.0 million. City documents state Figeac will invest about $21,000,000, with capital investment of $7,000,000 in machinery and equipment, which should qualify for HPIP credits. This means the company would receive tax credits equal to ($7000000 – $1000000) * 10% or $600,000. It’s possible that other expenditures would qualify for these credits. Tax credits are economically equivalent to a cash grant for both the state and the recipient.

The letter from Commerce also says the state will “underwrite a portion of the company’s actual expenses for training new employees.” No dollar value is given for this.

Finally, the city is issuing Industrial Revenue Bonds in an amount up to $20,680,000. The city does not lend this money to Figeac. Instead, the purpose of the IRBs is to enable property tax and sales tax forgiveness. City documents are sketchy as to the amount of tax that will be saved, but documents state “After the five year exemption period, the new improvements would generate an estimated $82,470 annually for the General Fund and $29,196 for the Debt Service Fund.” This means the city alone is forgiving $111,666 per year in taxes. City documents usually give the amount of tax that overlapping jurisdictions are abating, but this information is missing. Based on relative mill levies for the county, school district, and state, I estimate the total property tax benefit at $414,000 per year.

The IRBs also carry a sales tax exemption. The $7,000,000 in machinery and equipment would be exempt from sales tax, and possibly some of the property improvements. If Figeac spent $10,000,000 in expenditures subject to sales tax, the one-time benefit to Figeac is $715,000.

The following table summarizes the benefits.

Summary of benefits for Figeac Aero

WichitaLiberty.TV: Kansas Policy Institute Vice President and Policy Director James Franko

In this episode of WichitaLiberty.TV: Kansas Policy Institute has produced a study of the effect of state and local regulation on business. James Franko of KPI discusses. View below, or click here to view at YouTube. Episode 80, broadcast April 5, 2015.

The complete study from KPI may be read here.

Wichita city council member Jeff Longwell should not have voted

A sequence of events involving Jeff Longwell should concern citizens as they select the next Wichita mayor. Based on Wichita law, Longwell should not have voted on a matter involving the Ambassador Hotel, either for or against it.

In 2011 the Wichita City Council voted to award millions of taxpayer subsidy to the developers of the Ambassador Hotel in downtown Wichita. Because of the nature of one of the ordinances the council passed, citizens were able to petition to have it overturned. A successful petition was filed, so there was an election.

Ambassador Hotel sign 2014-03-07A group named “Moving Wichita Forward” was formed to campaign for the Ambassador Hotel for the February 28, 2012 election regarding the repeal of its special guest tax measure. The measure benefited Paul Coury, Dave Burk, and executives of Key Construction. The primary funder of the campaign was this ownership group.

As part of the campaign, on January 30, 2012 Moving Wichita Forward spent money with Luminance Display, a company that sold space on billboards.

Jeff Longwell Luminance Display 2012-01-30 excerpt

Based on a statement of substantial interests that Longwell filed in 2012, you can see that he had an ownership interest in Luminance Display.

Jeff Longwell SSI 2012-05-31 excerpt

So far, nothing contrary to Wichita city code has taken place. Yes, it is sleazy to sell advertising to people who have had business before the council in the past. But there’s nothing in the Wichita city code addressing this.

Then on April 16, 2013 Longwell voted in favor of Industrial Revenue Bonds for the Ambassador Hotel. The bond package allowed the hotel to avoid paying $703,017 in sales tax, according to city documents.

That is where Longwell crossed the line from being merely sleazy to acting contrary to city code. Here’s an excerpt from Section 2.04.050 Code of ethics for council members from the Wichita city code as passed in 2008:

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

The owners of the Ambassador Hotel were customers of a company that Jeff Longwell partially owned. Based on the laws of the City of Wichita, Longwell should not have voted on a matter involving the Ambassador Hotel, either for or against it.

Study on state and local regulation released

This week Kansas Policy Institute released a study of regulation and its impact at the state and local level. This is different from most investigations of regulation, as most focus on federal regulations.

Business Perceptions of the Economic Impact of State and Local Government Regulation coverThe study is titled “Business Perceptions of the Economic Impact of State and Local Government Regulation.” It was conducted by the Hugo Wall School of Public Affairs at Wichita State University. Click here to view the entire document.

Following in an excerpt from the introduction by James Franko, Vice President and Policy Director at Kansas Policy Institute.

Surprising to some, the businesses interviewed did not have as much of a problem with the regulations themselves, or the need for regulations, but with their application and enforcement. Across industries and focus group sessions the key themes were clear — give businesses transparency in what regulations are being applied, how they are employed, provide flexibility in meeting those goals, and allow an opportunity for compliance.

Sometimes things can be said so often as to lose their punch and become little more than the platitudes referenced above. The findings from Hugo Wall are clear that businesses will adapt and comply with regulations if they are transparent and accountable. Many in the public can be forgiven for thinking this was already the case. Thankfully, local and state governments can ensure this happens with minimal additional expense.

A transparent and accountable regulatory regime should be considered the “low hanging fruit” of government. Individuals and communities will always land on different places along the continuum of appropriate regulation. And, a give and take will always exist between regulators and the regulated. Those two truisms, however, should do nothing to undermine the need for regulations to be applied equally, based on clear rules and interpretations, and to give each business an opportunity to comply.

Ranzau, Peterjohn endorse Sam Williams for Wichita mayor

Despite past differences, two members of the Sedgwick County Commission have endorsed Sam Williams for Wichita Mayor.

Citing recent revelations that Jeff Longwell voted to use taxpayer funds that helped his private business profit, County Commissioners Richard Ranzau and Karl Peterjohn called on supporters of ethics reform and transparency to oppose Longwell and support Sam Williams.

“Even though Sam Williams has supported our opponents in the past, we think it is vital that he be elected over Longwell,” Peterjohn and Ranzau said in a joint statement.

“We have known for some time that Jeff Longwell has had a problem with ethics. In fact, the voters rejected his approach to government when he ran against me,” Karl Peterjohn stated. “It was during his race against me that Longwell presented the appearance that his vote was for sale. Now there is evidence that not only did he utilize his position on the City Council to enrich his campaign coffers, but he also has used it for his personal enrichment.”

According to campaign finance reports filed by Longwell, his campaign for County Commission accepted multiple out-of-state donations from the CEO of Walbridge and his spouse the day before he voted to award Walbridge a contract that was millions of dollars higher than another bid being considered. Three days after that vote, Longwell accepted thousands of dollars more from other Michigan-based employees of the company.

It was recently reported that Jeff Longwell made a motion and then supported the use of $10,000 in taxpayer money to sponsor the car show known as The Blacktop Nationals. What Longwell failed to disclose was that his company, Ad Astra Printing, which is registered as an LLC with Jeff Longwell as the only listed owner, received compensations for doing work for the event. Longwell recently admitted his firm did profit from the event. According to Wichita’s Code of Ethics for Council Members (Title 2, Section 2.04.050), council members “shall refrain from making decisions involving business associates, customers, clients, friends and competitors.” Longwell’s motion to use public funds for a project where he would personally profit is clearly a violation of the Code of Ethics for Council Members. The relevant Wichita law can be found here.

“For Wichita to move forward and to grow the jobs we all want, we have to work together in the interest of south-central Kansas — not in the self-interests of politicians,” stated Commissioner Richard Ranzau. “It is well-documented that Sam Williams has actually supported my opponents, as well as those of Karl Peterjohn, in the past, but I know that Sam’s top priority is enriching Wichita, not enriching himself. That’s why I am supporting Sam Williams for mayor. The public needs to have greater transparency and I believe Sam Williams will be an advocate for that. Jeff Longwell has been in office for 20 years and has done nothing to increase transparency or to make local government more accessible to the people,” Ranzau stated.

“Longwell’s consistent ethical lapses will damage economic development opportunities in Sedgwick County. Business leaders will shy away doing business in that manner. Sam Williams is a proven job creator, and I urge voters to support him for mayor,” stated Peterjohn.

Downtown Wichita deal shows some of the problems with the Wichita economy

In this script from a recent episode of WichitaLiberty.TV: A look at the Wichita city council’s action regarding a downtown Wichita development project and how it is harmful to Wichita taxpayers and the economy. This is from episode 77, originally broadcast March 8, 2015. View the episode here.

This week a downtown Wichita project received many economic benefits such as free sales taxes and a bypass of Wichita’s code of conduct for city council members.

Exchange Place
Exchange Place
The issue had to do with tax increment financing, or TIF. This is a method of economic development whereby property taxes are routed back to a real estate development rather than funding the cost of government. It’s thought that TIF is necessary to make certain types of projects economically feasible. I appeared before the Wichita city council and shared my concerns about the harmful effects of this type of economic development.

I said that regarding the Exchange Place project in downtown Wichita, I’d like to remind the council of the entire subsidy package offered to the project.

There are historic preservation tax credits, which may amount to 25 percent of the project cost. These credits have the same economic impact as a cash payment, and their cost must be born by taxpayers.

There is $12.5 million in tax increment financing, which re-routes future property tax revenues back to the project for the benefit of its owners. Most everyone else pays property taxes in order to pay for government, not for things that benefit themselves exclusively, or nearly so.

There is a federal loan guarantee, which places the federal taxpayer on the hook if this project isn’t successful.

The owner of this project also seeks to avoid paying sales taxes on the purchase of materials. City documents don’t say how much this sales tax forgiveness might be worth, but it easily could be several million dollars.

I said: Mayor and council, if it in fact is truly necessary to layer on these incentives in order to do a project in downtown Wichita, I think we need to ask: Why? Why is it so difficult to do a project in downtown Wichita?

Other speakers will probably tell you that rehabilitating historic buildings is expensive. If so, working on historic buildings is a choice they make. They, and their tenants, ought to pay the cost. It’s a lifestyle choice, and nothing more than that.

I told the council that I’m really troubled about the sales tax exemption. Just a few months ago our civic leaders, including this council, recommended that Wichitans add more to our sales tax burden in order to pay for a variety of things.

Only 14 states apply sales tax to food purchased at grocery stores for home consumption, and Kansas has the second-highest statewide rate. We in Kansas, and Wichita by extension, require low-income families to pay sales tax on their groceries. But today this council is considering granting an exemption from paying these taxes that nearly everyone else has to pay.

I told the council that these tax subsidies are not popular with voters. Last year when Kansas Policy Institute surveyed Wichita voters, it found that only 34 percent agreed with the idea of local governments using taxpayer money to provide subsidies to certain businesses for economic development. Then, of course, there is the result of the November sales tax election where city voters emphatically said no to the council’s plan for a sales tax increase.

This project is slated to receive many million in taxpayer-funded subsidy. Now this council proposes to wave a magic wand and eliminate the cost of sales tax for its owners. People notice this arbitrary application of the burden of taxation. They see certain people treated differently under the law, rather than all being treated equally under the law. People don’t like this. It breeds distrust in government. This council can help restore some of this trust by not issuing the Industrial Revenue Bonds and the accompanying sales tax exemption.

In response to my remarks, city council member and mayoral candidate Jeff Longwell had a few comments, as we see here in video from the meeting.

We see city council member and mayoral candidate Jeff Longwell contesting the idea that TIF funds are being rerouted to the benefit of the owners of the project. We’re getting a public parking garage is the city’s response.

Let’s look at the numbers and see if we can evaluate this claim. According to city documents, the project will hold 230 apartments, and the garage is planned to hold 273 parking stalls. You can imagine that many of the apartment renters or buyers will want a guaranteed parking space available to them at all times. And in fact, an early version of the development plan states: “A minimum of 195 spaces will be allocated for use by the apartments. The remaining 103 spaces will be for public parking.” So the city is giving up $12.5 million of tax revenue to gain 103 parking spaces. That’s 121 thousand dollars per parking spot. You can buy a very nice house in Wichita for that.

The actual situation could be even worse for the city’s taxpayers. The development agreement
states: “A minimum of 103 parking spaces shall be set aside in the Parking Garage for public parking and the balance for the exclusive use of the residents and guests of Exchange Place Building and Douglas Building.” It also holds this: “This allocation can be revised by Developer as market experience may demonstrate a need to reallocate parking spaces with consent of the City Representative (which consent shall not be unreasonably withheld or delayed).”

So a large portion of the parking garage is not a public benefit. It’s for the benefit of the apartments developer. If not for the city building the garage, the developer would need to provide these parking spaces in order to rent the apartments. And because of tax increment financing, the developer’s own property taxes are being used to build the garage instead of paying for government, like almost all other property taxes do, like your property taxes do. If this was not true, there would be no benefit to the developer for using tax increment financing. And if TIF did not have a real cost to the rest of the city’s taxpayers, we might ask this question: Why not use TIF more extensively? Why can’t everyone benefit from a tax increment financing district?

In his remarks, the city manager mentioned the Block One garage as a public asset, as it was funded by tax increment financing, so let’s look at the statistics there. According to the revised budget for the project, the plan is for 270 stalls in the garage. But 125 stalls are allocated for the hotel, and 100 are allocated for the Slawson development, and 45 allocated for the Kansas Leadership Center building. That leaves precisely zero stalls for public use. That’s right. If these three businesses make full use of their allocation of parking stalls, there will be zero stalls available for the public.

It’s not quite that simple, as Slawson will use its spaces only during the workday, leaving them available to the public evenings and weekends. Perhaps the same arrangement will be made for the Kansas Leadership Center. Being near the Intrust Bank Arena, the garage is used for parking for its events. Except, there aren’t very many event in the arena. In some months there are no events. But you can see that something that is promoted for the public good really turns out to be narrowly focused on private interests.

The manager also mentioned the garage on Main Street. According to city documents, the cost to rehabilitate this garage is $9,685,000, which creates 550 parking stalls. But the city is renting 180 parking stalls to a politically-connected company at monthly rent of $35. We looked at this a few months ago and saw how bad this deal is for city taxpayers.

In his remarks, Mayor Carl Brewer thanked city staff and the developers for “working collectively as a team.” He criticized those who say, in his words, “let’s not do anything, let’s just see where the chips may fall.” As an alternative, he said “we can come together, we can work together, we can work collectively together, and we can bring about change and form it the way we want.”

These remarks illustrate the mayor’s hostility to free markets, that is, to thousands and millions and billions of people trading freely in order to figure out how to allocate scarce resources. But the mayor likens the marketplace of free people to a random event — where the chips may fall, he said. But that’s not how markets work. Markets are people planning for themselves, using their knowledge and preferences and resources in order to build things they want, and what they think others will want. That’s because in markets, the only way you can earn a profit is by doing things that other people want. You have to please customers in order to profit.

But Wichita Mayor Carl Brewer says we need to work collectively together. He says we can form the future the way “we” want. Well, who is the “we” he’s talking about? As we see, the dynamics of free markets results in people doing what other people want. But the “we” the mayor talks about is politicians, bureaucrats, cronies, and do-gooders deciding how they want things to be done, and using your money to do it. That reduces your economic freedom. Your money is directed towards satisfying the goals of politicians and bureaucrats rather than actual, real people.

Here’s how bad this deal really is for Wichita. In my remarks to the council I also said this: Might I also remind the people of Wichita that some of their taxpayer-funded subsidies are earmarked to fund a bailout for a politically-connected construction company for work done on a different project, one not related to Exchange Place except through having common ownership in the past? I don’t think it is good public policy for this city to act as collection agent for a private debt that has been difficult to collect.

I was referring to the fact that the Exchange Place project started as an endeavor of the Minnesota Guys, two developers who bought a lot of property in downtown Wichita and didn’t do very well. They both have been indicted on 61 counts of securities violations in relation to their work in downtown Wichita. One of their projects was the Wichita Executive Center on north Market Street. The Minnesota Guys still owe money to contractors on that project, and some of the taxpayer funding for the Exchange Place project will be used to pay off these contractors.

Why, you may be asking, is the city acting as collection agent for these contractors? There’s an easy answer to this. Money is owed to Key Construction company. We’ve talked about this politically-connected construction firm in the past. Through generous campaign contributions and friendships, Key Construction company manages to gain things like no-bid contracts and other subsidies from the city.

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.
This is a problem. Dave Wells, the president of Key Construction, is a friend of the mayor, as well as frequent and heavy campaign financier for the mayor and other council members. And the mayor voted for benefits for Wells and his company. That is a violation of Wichita city code, or at least it should be. Here’s an excerpt from Wichita city code section 2.04.050, the Code of ethics for council members as passed in 2008: “[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.”

Dave Wells and Carl Brewer are friends. The mayor has said so. But the City of Wichita’s official position is that this law, the law that seem to plainly say that city council members cannot vote for benefits for their friends, this law does not need to be followed. Even children can see that elected officials should not vote economic benefits for their friends — but not the City of Wichita.

There’s much research that shows that tax increment financing is not an overall benefit to a city’s economy. Yes, it is good for the people that receive it, like the developer of Exchange Place and the mayor’s friends and cronies. But for cities as a whole, the benefit has found to be missing. Some studies have found a negative effect of TIF on economic progress and jobs. That’s right — a city is worse off, as a whole, for using tax increment financing. The evolving episode involving Exchange Place — the massive taxpayer subsidies, the cronyism, the inability of the mayor and council members to understand the economic facts and realities of the transactions they approve, the hostility towards free markets and their benefits as opposed to government planning of the economy — all of this contributes to the poor performance of the Wichita-area economy. This is not an academic exercise or discussion. Real people are hurt by this.

Mayor Brewer has just a month left in office, and there will be a new mayor after that. We, the people of Wichita, have to hope that a new mayor and possibly new council members will chart a different course for economic development in Wichita.

A Wichita Shocker, redux

Based on events in Wichita, the Wall Street Journal wrote “What Americans seem to want most from government these days is equal treatment. They increasingly realize that powerful government nearly always helps the powerful …” But Wichita’s elites don’t seem to understand this.

A Wichita ShockerThree years ago from today the Wall Street Journal noted something it thought remarkable: a “voter revolt” in Wichita. Citizens overturned a decision by the Wichita City Council regarding an economic development incentive awarded to a downtown hotel. It was the ninth layer of subsidy for the hotel, and because of our laws, it was the only subsidy that citizens could contest through a referendum process.

In its op-ed, the Journal wrote:

The elites are stunned, but they shouldn’t be. The core issue is fairness — and not of the soak-the-rich kind that President Obama practices. One of the leaders of the opposition, Derrick Sontag, director of Americans for Prosperity in Kansas, says that what infuriated voters was the veneer of “political cronyism.”

What Americans seem to want most from government these days is equal treatment. They increasingly realize that powerful government nearly always helps the powerful, whether the beneficiaries are a union that can carve a sweet deal as part of an auto bailout or corporations that can hire lobbyists to write a tax loophole.

The “elites” referred to include the Wichita Metro Chamber of Commerce, the political class, and the city newspaper. Since then, the influence of these elites has declined. Last year all three campaigned for a sales tax increase in Wichita, but voters rejected it by a large margin. It seems that voters are increasingly aware of the cronyism of the elites and the harm it causes the Wichita-area economy.

Last year as part of the campaign for the higher sales tax the Wichita Chamber admitted that Wichita lags in job creation. The other elites agreed. But none took responsibility for having managed the Wichita economy into the dumpster. Even today the local economic development agency — which is a subsidiary of the Wichita Chamber — seeks to shift blame instead of realizing the need for reform. The city council still layers on the levels of subsidy for its cronies.

Following, from March 2012:

A Wichita shocker

“Local politicians like to get in bed with local business, and taxpayers are usually the losers. So three cheers for a voter revolt in Wichita, Kansas last week that shows such sweetheart deals can be defeated.” So starts today’s Wall Street Journal Review & Outlook editorial (subscription required), taking notice of the special election last week in Wichita.

The editorial page of the Wall Street Journal is one of the most prominent voices for free markets and limited government in America. Over and over Journal editors expose crony capitalism and corporate welfare schemes, and they waste few words in condemning these harmful practices.

The three Republican members of the Wichita City Council who consider themselves fiscal conservatives but nonetheless voted for the corporate welfare that voters rejected — Pete Meitzner (district 2, east Wichita), James Clendenin (district 3, southeast and south Wichita), and Jeff Longwell (district 5, west and northwest Wichita) — need to consider this a wake up call. These members, it should be noted, routinely vote in concert with the Democrats and liberals on the council.

For good measure, we should note that Sedgwick County Commission Republicans Dave Unruh and Jim Skelton routinely — but not always — vote for these crony capitalist measures.

The Wichita business community, headed by the Wichita Metro Chamber of Commerce endorsed this measure, too.

Hopefully this election will convince Wichita’s political and bureaucratic leaders that our economic development policies are not working. Combined with the startling findings by a Tax Foundation and KMPG study that finds Kansas lags near the bottom of the states in tax costs to business, the need for reform of our spending and taxing practices couldn’t be more evident. It is now up to our leaders to find within themselves the capability to change — or we all shall suffer.

WichitaLiberty.TV: A downtown Wichita deal shows some of the problems with the Wichita economy

In this episode of WichitaLiberty.TV: We’ll examine the city council’s action regarding a downtown Wichita development project and how it is harmful to Wichita taxpayers and the economy. View below, or click here to view at YouTube. Episode 77, broadcast March 8, 2015.

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.