Wichita’s Jeff Longwell on TIF districts, tax abatements

Is a tax increment financing (TIF) district a tax abatement? Wichita city council member Jeff Longwell, now Wichita’s vice mayor, doesn’t think so. During this week’s city council meeting, Longwell said this in explaining his support of a TIF district created for the benefit of Real Development: “One of the things that people I think need to understand is that this is not a tax abatement.”

He said tax revenues will increase from $28,000 to half a million dollars, repeating that it is not a tax abatement.

So is it true that TIF is not a tax abatement?

A little background: The Wichita City council grants property tax abatements regularly as part of its Industrial Revenue Bond program. In the IRB program, the city is not the lender of funds, and it does not guarantee that the bonds will be repaid. Instead, the benefit of the IRB program is that the applicant won’t have to pay property tax on property purchased with the bond money. This abatement is generally granted for a period of ten years, although it is reviewed after five years to see if the company is fulfilling the promises it made to justify the tax abatement. In addition, a sales tax exemption may be granted on the property purchased with the bond money.

Confused? Many people are. A few weeks ago the city issued IRBs to a Wichita movie theater operator. Comments left at various online forums often argued that the city should not be lending money to the theater and its controversial ownership group. But as we’ve seen, the city is not making a loan. Instead, the IRB program is simply a vehicle that is used to grant relief from paying property taxes to the city, county, and school district.

So the IRB program, despite its name, is a tax abatement program. What about tax increment financing, then?

Under TIF, a district is formed. The property taxes being paid by a property in the district at the time of formation is noted and called the base. Usually this property is blighted or run-down, so this base is a very low value.

Then a development plan is created, perhaps to build apartments or a shopping center. Based on that plan and the property taxes that the completed project will likely pay, the city will borrow money and give it to the developers.

After the project is completed, the tax appraiser notices that there’s something new and valuable where there wasn’t before, and he levies a higher tax bill on the property. The difference between the original taxes — the base — and the new taxes is called the increment.

Under normal conditions when new property comes on the tax rolls, the tax revenue is used to provide public services such as police and fire protection. The school district is usually a recipient of a large portion of the new tax revenue, which might be used to pay for the schooling of residents of the new apartments, for example.

But in a TIF district, what happens to this new tax revenue — the increment?

Recall that the city borrowed money and gave it to the developers. The new property taxes — the increment — is used to pay off these bonds.

So council member Longwell is correct, in a way. Real Development will pay increased property taxes.

But when these increased taxes are used to pay off bonds that exclusively benefit Real Development, how is this any different from not paying property taxes?

Consider development not in a TIF district. Developers generally borrow money. Then they have to make loan payments and higher tax payments.

But TIF developers pay only higher taxes. There are no loan payments, as their increased property tax payments are used to pay off the loan.

So when considering the total economic reality, council member Longwell is wrong. Several other council members have the same mistaken belief.

Tax increment financing is a tax abatement in disguise. Actually, it’s worse than that. Tax abatements granted in the IRB program don’t require the city to be on the hook for a loan. But in a TIF district, the city is the lender, and city taxpayers are liable if the TIF district doesn’t perform up to projections. This has happened in Wichita, and taxpayers had to pay in one way or another.

Why is Longwell, now Wichita’s vice mayor, unable to grasp these facts? Perhaps he does but chooses to ignore them. He has a reason to do so. Downtown Wichita real estate developers — let’s be clear: developers who seek public subsidy instead of working to meet market demand — are generous with campaign contributions, funding both political liberals like Wichita city council member Janet Miller and self-styled fiscal conservatives such as Longwell.

Longwell’s term expires next spring, and he may choose to run for his same office or even the mayor’s office, as some political observers have speculated.

Longwell has already drawn one challenger for his city council position, tea party activist Lynda Tyler. While lacking experience holding elective office, Tyler has well-established conservative credentials and can be expected to run a vigorous and well-funded campaign.

Longwell, who along with Wichita Mayor Carl Brewer complains that Wichita doesn’t have enough “tools in the toolbox” for dishing out economic development incentives to politically-connected city hall insiders, will have to explain his actions to voters in his largely conservative west-side district.

Someone should ask him if he really understands the economic reality of tax increment financing districts.


14 thoughts on “Wichita’s Jeff Longwell on TIF districts, tax abatements”

  1. Mr. Longwell has tied his future to Mayor Brewer. Longwell will not challenge Brewer this time, but will wait until Brewer is out because of term limits. Ms. Tyler is an excellent candidate and will defeat Mr. Longwell by tying him to his awful votes; the 9% unemployment and to his 100% voting record with liberal Democrat Brewer. Mr. Longwell has not seen a “taxpayer funded giveaway” that he doesn’t like. Longwell can learn from Bill Warren….all the money in the world could not get him elected.

  2. Wow, now I get it. That is the best explanation of IRBs and TIFs I’ve seen yet. Thanks for the education.

  3. There are 4 Rebublican council members but not not one fiscal conservative on this City Council. I say we vote everyone out and vote only for fiscally responsible candidates…of which there are zero now.
    Why would Schlapp and Longwell attend the Tea Party as reported by the Eagle? Reviewing their voting records flys in the face of anything the Tea Party stands for!

  4. “Someone should ask him if he really understands the economic reality of tax increment financing districts.”

    Someone should ask you the same thing. I have repeatedly tried, but you don’t seem to get it. However, since I have nothing better to do this evening, I will try once again.

    “the city will borrow money and give it to the developers. ”

    First and foremost, bonding is not borrowing. Suggest that you Google it and understand the difference. In the financial world, they are similar but not the same. Secondly, the city does not “give” the money to the developers. I suppose it could be argued that it’s a matter of context but your use of “give” is incendiary. The state statutes outline the qualified expenses for which TIF money can be used. There are limitations unlike a bank loan.

    “Under normal conditions when new property comes on the tax rolls, the tax revenue is used to provide public services such as police and fire protection. ”

    The key word in this paragraph is “new”. TIF is not dealing with new development per se, but rather redevelopment. Public services such as police and fire already exist and no “new” demands are necessarily being created. Will it require new fire stations? No. New police stations? No. New streets? No. New water lines? No. In this case, will there be a new PUBLIC garage? Yes.

    “The school district is usually a recipient of a large portion of the new tax revenue, which might be used to pay for the schooling of residents of the new apartments, for example.”

    Actually, the school district benefits from TIF projects by getting a larger share of state funding than they would otherwise. In this case, the target market for Exchange Place really isn’t for new families, so it is doubtful that a burden is being placed upon 259.

    “The new property taxes — the increment — is used to pay off these bonds.”

    About the only accurate statement in your diatribe.

    “But when these increased taxes are used to pay off bonds that exclusively benefit Real Development, how is this any different from not paying property taxes?”

    Well, it’s not and you need to get over it. Real Development will in fact pay their property taxes. As illustrated above, if there is no additional burden on already existing public services. The existing tax base that is already contributing to the existing level of public service continues to be paid. The new increment that goes to pay of the bonds is more of an earmark.

    “But TIF developers pay only higher taxes. ”

    This isn’t necessarily true and is a very naive statement. The fact of the matter is that redevelopment is inherently more expensive than green field development for a number of reasons. The only way this statement can be rationalized is to make an apple to apple comparison between developing downtown and on the outskirts for the same type of land use. That’s pretty hard to do.

    “So when considering the total economic reality, council member Longwell is wrong. ”

    I don’t believe that he’s any more wrong than you are.

    “Tax increment financing is a tax abatement in disguise.”

    Not really unless one doesn’t understand the difference. Tax abatement means no property taxes are being paid. Under TIF, property taxes are still paid.

    “But in a TIF district, the city is the lender, and city taxpayers are liable if the TIF district doesn’t perform up to projections.”

    Uh, no. The city is not the lender. Again, you need to understand the difference between bonds and loans. If the money was loaned to Real Development, then, yeah, the city would be the lender. Not the case here. However, the underwriting requirements for the bonds will require the full faith and credit of the city as a back stop. So, yeah, the city has assumed some risk in the deal.

    “developers who seek public subsidy instead of working to meet market demand — are generous with campaign contributions”

    Uh, I seem to recall a number of developers who supposedly aren’t seeking public subsidy being very generous with campaign contributions as well. Gee, weren’t you assisting with Barfield’s failed city council election? Do I need to list the developers who contributed to his campaign? Pot meet kettle.

    Finally, let’s finish up what we know about TIF:

    1) TIF financing is a way to earmark future tax revenues. Future tax revenues that would not exist but for the redevelopment.

    2) TIF is not a tax abatement. All properties within the TIF district will continue to pay their property takes.

    3) TIF is not a loan. Yes money is provided to the developers for eligible expenses. The funds come from a bond issuance and are not a loan.

    4) TIF doesn’t necessarily create any new demand on public services.

    5) This blog is not journalism.

  5. If I was cynical, I would believe that Patricia must be on real development’s payroll to provide such a specious defense of the indefensible subsidies for this dubious project. Or she is a trust fund recipient.

    The city will be on the hook for an additional million in subsidies to developers who are already struggling to pay their bills according to the Wichita Business Journal’s reports. This was to leverage more federal tax dollars for this struggling project–gee, just what we need, more federal spending on housing!

    If Patricia’s logic was correct then the best solution would be to make this entire community a TIF district to promote redevelopment. Mr. Weeks and Patricia have omitted one of the most telling points from last week’s city council meeting that expanded the city’s tax funded development subsidies. Mayor Brewer pointed out that on one of his recent trips (that elected official sure seems to spend a lot of time travelling out of state) that experts at Harvard and Yale universities had reported that downtown Wichita actually had “…too much parking…” That was an incredible and unreported revelation to those of us who have seen this discussion on the city’s TV channel. The perpetual report is that Wichita has a parking shortage downtown and that is the main reason for subsidizing developers like real development to expand parking…but why do so if the Ivy league “experts” say we have too much?

    This was a very odd comment for the mayor to make prior to joining four council members to approve expanded subsidies. If TIF districts did not cost revenues, why does the state require cities to send notices to school districts and counties who will be negatively impacted by this type of property tax shift from TIFs?

    One last point: Patricia claims that TIF funds come from bond proceeds. This is not free money. The proceeds must be repaid with tax funds. This is a way for developers to get tax funds to pay for parking lots that are necessary for their developments. That seems to be the key behind the latest attempt to get more federal and city subsidies for the politically preferred downtown developers.

    Keep it up Bob, you are having an impact on this debate and performing a valuable public service for Wichita. I can’t believe it, but it seems like even the reliably statist Wichita Eagle editorial page actually seems to agree with you on the major points of this subsidy scheme too! That is remarkable based upon their past preference for politically directed “re-development” schemes.

  6. No, I’m not on Real Development’s payroll. Furthermore, my comments were not in defense of the Exchange Place TIF; rather, they were directed at the blatantly wrong comments about how TIF works and what it is.

    “If Patricia’s logic was correct then the best solution would be to make this entire community a TIF district to promote redevelopment.”

    Uh, read my comments. TIF is for REDEVELOPMENT. Redevelopment of areas that are deemed to be blighted. TIF funds are earmarks for a specific purpose. It can easily be argued that the entire community is a TIF district. As the community grows, additional demand is created for public services such as new fire stations, street widenings, upgrades to the water system, sewage treatment plants, etc. Growth is good as it creates demand for housing, etc. Demand means inflationary pressures, i.e. housing prices go up. As prices go up, so do taxes. And the circle goes on and on and on.

    “Patricia…omitted one of the most telling points from last week’s city council meeting…that downtown Wichita actually had “…too much parking…”

    Now that is interesting. I did not hear that remark. However, in general, parking has to be convenient. No one wants to walk several blocks everyday multiple times a day for office space when you can get front door parking in the ‘burbs. Entertainment parking is different.

    “Patricia claims that TIF funds come from bond proceeds. This is not free money. The proceeds must be repaid with tax funds. ”

    No only did I claim it, it’s also factual and true. I didn’t say it was free money either. And, remember, the tax funds to pay off the bonds come from the properties within TIF district. Granted, there is risk and if there are shortfalls, then the shortfall must be made up with city at large funds.

    What is interesting in this debate is that there are a number of property owners in the TIF district who have complained about the increase in their property taxes since Real Development hit town. I find this to be ironic since no one wants to pay taxes based on their perceived value of the property. However, just try to buy their property.

    Case in point, Commerce Plaza Building as the southeast corner of Topeka and Douglas. According to the WBJ, RD had it under contract for $1.1M. According, to county real estate records, it is only appraised at $676,000. I’m quite sure without knowing the owners, that they wouldn’t want to pay property taxes based upon $1.1M.

    “Keep it up Bob, you are having an impact on this debate and performing a valuable public service for Wichita.”

    I have stated a number of times, that I appreciate Bob’s blog. However, I wouldn’t say it’s a valuable public service beyond that. The political slant and misrepresentation of facts hardly serves the public as a whole but only feeds the rhetoric of the obtuse and ill-informed.

  7. Bob’s explanation is correct, but we still have apologists for the City hall regime and their developers friends. There are four Republicans on the Council, but both Schlapp and Gray are term-limited so they won’t be spending our tax money after the Spring of 2011. Skelton is also term-limited and has never understood what he has voted for. Longwell has to go! Has anyone noticed that since Longwell came unto the City council he has been the spoke’s person for Democrat Mayor Brewer and the Council? Brewer is always unavailable for comment and Longwell has become his “errand boy”. These are Republicans by registration only. It’s interesting to note that Schlapp is co-chair of Brownback’s campaign in Sedgwick County……a real vote loser!

  8. Patricia:
    Since you seem to know so much about how things work, always appear to have an inside track to the goings on in downtown whore redevelopment please tell me and all the readers about how successful TIF districts are in Wichita. I want facts, numbers that back up ROI, not feel good warm fuzzies about blighted areas.
    Jack DeBoer always makes money. People look to him as being successful…and he is, for Jack DeBoer.

    How’s the reverand/school board member Kevass Harding faring with his TIF district at Oliver and 13th? I drive by there almost every day at various times and the parking lot is virtually empty and they have store front parking.

    How’s poor Mike Loveland doing with his TIF at Douglas and Rutan? Not one of those condos has been sold and they have been sitting there for over a year….empty.

    And then there are the political entrepreneurs of Old Town fame that have the balls to keep asking the City for more money or threatening to pull out or shut down or whatever if they don’t get this or that.

    And then there is Real Development…name one of their successful projects and back up your assesment with financial facts. They have admitted to financial problems but the good ole City Council stands behind them again and again.

    You can explain the so called benefits /intent of TIFs all you want. If free market developers won’t touch downtown doesn’t that give you pause for concern?
    TIFs are risky and moreso now given the financial scenario. Yet
    this Council continues to put each and eveyone one of us at risk everytime they approve these subsidized projects. I guarantee you if they were risking their own money I’d like to see what projects were approved.

  9. JJ, all good questions and thoughts. Theory versus actual performance. Unfortunately, I don’t have the answers that you seek. That said, I, like you, am interested in how the TIFs actually perform for both the city and the developers.

    The Eagle did a review of the TIF districts last year as I recall and found that for the most part they under performed, which didn’t necessarily mean that it cost the city anything. I believe the only one that was stellar was the one at Central and Hillside near Wesley. The bonds on that one were paid off early. You seem to have inadvertently forgotten about that one. Perhaps because it doesn’t support your arguments against TIF.

    I would not disagree that TIFs should be used prudently and that the financial structure of past deals may not have been as they should. Hindsight is always 20-20. That said, we should learn from our past mistakes. I trust this city manager to be much more conservative than his predecessors. And he should given the current economic conditions.

    You stated, “If free market developers won’t touch downtown doesn’t that give you pause for concern?” Sure, I am concerned but perhaps for different reasons. The free market made its choice with respect to downtown. It’s called Waterfront. A great project and quality development. It’s tenants, Foulston Siefkin, Commerce Bank, Delta Dental, Adams Jones, and numerous others were all downtown.

    So where did that leave downtown? Vacant office space, declining property values, and an eroding tax base. So what’s your answer to reverse this condition? Is this condition a concern? It should be, in my opinion.

    The fact of the matter is that the free market doesn’t solve all the problems. If it did, then TIF legislation would never have been needed in the first place.

    Downtown redevelopment is inherently more expensive. Many of the buildings are on land leases with multiple ownerships. Buildings constructed over the past 100 years don’t meet ADA requirements, fire code requirements, parking requirements and lack the modern conveniences that newer buildings have.

    I don’t have all the answers nor do I pretend to. And, I don’t make apologies for the council and its actions. However, I do understand, like the council, that the downtown issue is more complicated than merely questioning the use of TIF.

  10. Thanks Pat

    You are correct. I did forget Hillside and Douglas but not on purpose. That appears successful…(thank goodness for one)…because it was around a hospital it probably did not need to be a TIF. Very very small risk there….
    I think the real issue here Pat is whether we should look to government everytime a developer wants something but can’t swing it on his own. This is the problem I have. If you look to the other TIFs I mentioned and the people involved …the same names/connections keep popping up.
    Looking to government to reverse conditions is not the answer.
    In fact, it is often a recipe for a lot of wasted $s. Sometimes we can’t always get what we want but that’s the mindset (to get what we want)unfortunately that drives many people to falsely look to government to become involved in private development. I think it is wrong in 85% of the cases.
    I wish you did have those numbers but thanks for responding…..
    we need more than a wing and prayer…….

  11. JJ, you raise good points, none of with which I disagree. The question really shouldn’t be whether or not to use TIF, but rather the quality of the development, the risk involved, the track record of the developers, the financial benefits, the public benefits, etc.

    Also, one side note. The public is engaged in 100% of all development through the subdivision regulations, the zoning code, building code, etc. For the most part, the city’s financial policies with respect to both new development and redevelopment have been fairly conservative. However, changing economic enviroment and the changing socieo-economic environment should dictate that all policies should be periodically reviewed to ascertain their validity.

    I appreciate your comments and thoughts.

  12. Hi, I KNOW that most of you aren’t going to like this post, but here it goes anyway:

    Patricia wrote: “The question really shouldn’t be whether or not to use TIF, but rather the quality of the development, the risk involved, the track record of the developers, the financial benefits, the public benefits, etc.”

    I agree, we should NEVER use TIF districts. The Wichita taxpayers, Sedgwick county taxpayers, and I’m sure the Kansas taxpayers are tired of buying buildings for developers.

    With respect to “The public is engaged in 100% of all development through the subdivision regulations, the zoning code, …” Yes they are, but from my experience the city will do what the developers want, not what the citizens want. I guess “it’s for our own good”. My experience is with the apartment buildings we (the federal government) bought behind the Rock Road Sam’s club. After allowing a few “low income” renters for a few years (less than 10), the loan is forgiven. Our neighborhood fought the development, but we were overruled.

    Mike

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