In Wichita, how tax increment financing can channel tax money

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

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

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

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

However much is saved, it’s money that otherwise would have gone into the pockets of Key Construction. Because of the way the garage is being paid for, that money would not have been a cost to Douglas Place’s developers. Instead, it would have been a giant ripoff of Wichita taxpayers.

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

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

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

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

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

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

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

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

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

It’s no wonder Key Construction principals contributed $13,500 to Mayor Carl Brewer and four city council members during their most recent campaigns. Council Member Jeff Longwell alone received $4,000 of that sum, and he also accepted another $2,000 from managing member David Burk and his wife.

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

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

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


6 thoughts on “In Wichita, how tax increment financing can channel tax money”

  1. Pay to play in good ol’ Wichita? Who’d have thunk that Tammany Hall style politics would be alive and well in the
    21st century here? The rate of return for the developers on their political donations has to be in four figure percentages! That is Chicago style change that you can believe in.

  2. Seriously, for all the government bashing that you do, you now suggest that government can build the garage more efficiently and effectively? Will the government be liable to the developer if, among other things, the garage isn’t constructed correctly, on time, or if the garage contractor interferes with the contractor doing the hotel work? You pontificate much about things which you know so little of.

    You know for fact that a long past city council adopted a policy that allows a developer to choose his team on projects of this nature yet you intentionally distort the facts in order to deceive the many. Doesn’t mean the policy shouldn’t be revisited to question its validity but to use it as a platform to insinuate corruption and graft is disingenious at best and downright dishonest at worst.

    There are many in this community who know your deceit. so like many things in life folk, caveat emptor!, be careful drinking the Bob Weeks Kool-Aid. What may appear to be factual, more times than not, isn’t.

  3. Wow. I didn’t see anywhere in the article where Bob said that government should build the garage.

    To say that Bob wrote things he didn’t, and then to use that as a basis for criticism, is dishonest. I think an apology is in order.

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

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

    Okay, your point is well taken. Bob did not specifically state that the city should bid and build the garage. So, who should bid the contract? If it’s not a publicly bid project subject to state procurement laws, then there is no requirement to take the low bidder. An unfortunate public myth is that low bid equal best value. Isn’t necessarily the case. And, since the developer is required to guarantee any shortfalls in the TIF funding, there is already a built-in incentive to minimize costs.

  5. TIF= property tax funds to pay for developer’s parking garages. Let the rest of the community pay for police, fire, schools, EMS, and the local govt. services that matter. No bid contracts are preferred by the insiders.

    It is important to give tax funds to developers through a process only a handful of developers and city hall bureaucrats even understand….right?!?

    Is this a great community, or what? All sarcasm in this post is intended.

  6. @ictator, you and others seem to conveniently forget that the TIF is based on the new tax increment. no new development = no new taxes. the public hasn’t lost and isn’t losing anything with this project. furthermore, the developer is paying taxes just like everyone else and until his money for taxes are paid, it isn’t your money or anyone else’s either.

    similar to the parable of chicken little, you can flaunt that dog for as long as you want, but anyone with some intellect isn’t buying it.

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