Voice For Liberty

Author: Bob Weeks

For Wichita, water supply decisions loom
Now that the Wichita City Council has all but recommended that voters raise taxes in order to spend $250 million for water supply enhancements, citizens need to consider recent history and how current decisions are made.
Through the Community Investments Plan process and by other means, citizens have told the City of Wichita they’re concerned about future water supply.
Those who have been paying attention might be surprised that there is a water crisis. That’s because when Bob Knight was mayor, he was told that Wichita had sufficient water for the next 50 years. That was about eleven years ago.
More recently, the city prepared a document in March 2013 titled Wichita Area Future Water Supply: A Model Program for Other Municipalities. It touts an expensive investment that is part of a “plan to ensure that Wichita has the water it needs through the year 2050 and beyond.”
The project boasted of is the City of Wichita Aquifer Storage and Recovery Program or ASR. Its cost, so far for Phases I and II, is $247 million. According to the document, two more phases are contemplated.
City of Wichita Aquifer Storage and Recovery Program schematic diagram.
Reading the document, published just last spring, one might be led to believe that everything is fine, water-wise: “In 1993 the Wichita City Council adopted an Integrated Local Water Supply Plan that identified cost effective water resources that would be adequate to meet Wichita’s water supply needs through the year 2050.”
But earlier this year the Wichita Eagle reported “Wichita’s $240 million aquifer storage and recovery program — promoted to taxpayers in the early 1990s as a way to supply the city with water for 50 years — could soon be relegated to serving as a bit player in the city’s long-term water future.”
Later in the same article, the newspaper reported “The ASR project has been plagued by problems, city officials said, including equipment failures and a significant drought that idled the project because of low water levels in the Little Arkansas River.”
Economic vs. political thinking
It appears the plan the city council favors is to expand the ASR project at a cost of $250 million, thereby doubling the amount spent on this project. Some council members have noted the low utilization of the ASR and see its expansion as a way to wring greater efficiency from the plant.
But this mode of thinking is not rational. What has been spent on the ASR is now properly classified as sunk costs. These are costs that have been spent and can’t be recovered. Sunk costs are not relevant to future decisions. Instead, the city needs to focus on the marginal improvements that can be made, and how to get the best value for these future costs.
That’s the economic way of making decisions. But, of course, decisions on Wichita’s future water supply are being made in the political sphere.
How did Wichita get in this position?
It’s vitally important that Wichita develop a plan for an abundant water supply. At the same time, we ought to be asking, as does Johnny Stevens, how this problem developed. The Wichita Business Journal reported this last summer:
Wichita officials — thanks to a couple of weeks of rain — said they were able this week to dodge possible water restrictions and punitive measures as a means of coping with the ongoing drought.
But Wichita developer Johnny Stevens voiced to me today something I have heard from others in the community recently.
“How did it even get to this point?” Stevens said. “It shouldn’t have gotten this far.”
Stevens thinks poor leadership is to blame and can’t understand how elected officials ever let the community seemingly come so close to the edge of such a critical issue.
He said long-term solutions are needed, but he also warns that they have to be made using solid data. Continue reading at Developer Johnny Stevens on water issue: How did it get to this?
Long-term thinking: This is not characteristic of political leaders, whose time horizon rarely extends beyond the next election season. Are there other ways to secure water for Wichita? Is Wichita considering private-sector solutions?
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May 28, 2014
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?
The campaign manager for United States Senator Pat Roberts has touted on Twitter the candidate’s perfect record on FreedomWorks scorecards for 2014:
.@miltonwolfmd: who's the real conservative? @PatRoberts2014 has a prefect vote score with @FreedomWorks #tcot http://t.co/TslzTsZoOF
— Leroy Towns (@dltowns) May 22, 2014
FreedomWorks — whose motto is “Government fails. Freedom works.” — describes itself like this:
We are over 6 million Americans who are passionate about promoting free markets and individual liberty. Our members all share three common traits: a desire for less government, lower taxes, and more economic freedom.
For over a quarter century, FreedomWorks has identified, educated, and actuated citizens who are enthused about showing up to support free enterprise and constitutionally limited government.
So it’s good that Sen. Roberts is voting in favor of the goals of FreedomWorks. Economic freedom, free enterprise, and limited government are goals we need to work towards.
Voting record for several U.S. Senators, from FreedomWorks. Click for larger version.
But: Until the last two years, Roberts’ score on the FreedomWorks scorecard followed the pattern of a group of well-known Republican senators: Thad Cochran, Lindsey Graham, Richard Lugar, Mitch McConnell, and John McCain. In some years this group voted well according to FreedomWorks’ criteria, but in many years their voting record was poor.
But this group of like-minded GOP senators has a renegade member. For 2013 and 2014 Pat Roberts’ score is markedly higher than the other members of this group. Roberts announced his intent to run for reelection in January 2013.
On the chart I’ve included records for Jim DeMint and Harry Reid to provide two examples of voting records that value — and disrespect — economic freedom, according to FreedomWorks.
Voting record for U.S. Senator Pat Roberts, from FreedomWorks. Click for larger version.
Voters might want to consider who is the real Pat Roberts: The one that votes along with Mitch McConnell (even less supportive of economic freedom in some years)? Or the one that votes in favor of less government, lower taxes, and more economic freedom only when an election approaches?
You can investigate the FreedomWorks scorecards yourself. Click here to use the interactive visualization that plots senators individually, showing as many as you want. Click to add or remove senators.
Or, you may use the visualization that blends voting records on one chart.
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May 28, 2014
In Kansas and Wichita, there’s a reason for slow growth
If we in Kansas and Wichita wonder why our economic growth is slow and our economic development programs don’t seem to be producing results, there is data to tell us why: Our tax rates are too high.
In 2012 the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms.
The report is Location Matters: A Comparative Analysis of State Tax Costs on Business.
The study is unusual in that it looks at the impact of states’ tax burden on mature and new firms. This, according to report authors, “allows us to understand the effects of state tax incentives compared to a state’s core tax system.” In further explanation, the authors write: “The second measure is for the tax burden faced by newly established operations, those that have been in operation less than three years. This represents a state’s competitiveness after we have taken into account the various tax incentive programs it makes available to new investments.”
The report also looks at the tax costs for specific types of business firms. For Kansas, some individual results are better than overall, but still not good. For a mature corporate headquarters, Kansas ranks 30th. For locating a new corporate headquarters — one that would benefit from tax incentive programs — Kansas ranked 42nd. For a mature research and development facility, 46th; while new is ranked 49th. For a mature retail store, 38th, while new is ranked 45th.
There are more categories. Kansas ranks well in none.
The report also looked at two cities in each state, a major city and a mid-size city. For Kansas, the two cities are Wichita and Topeka.
Among the 50 cities chosen, Wichita ranks 30th for a mature corporate headquarters, but 42nd for a new corporate headquarters.
For a mature research and development facility, Wichita ranks 46th, and 49th for a new facility.
For a mature and new retail store, Wichita ranks 38th and 45th, respectively.
For a mature and new call center, Wichita ranks 43rd and 47th, respectively.
Kansas tax cost compared to neighbors
In its summary for Kansas, the authors note the fecklessness of Kansas economic development incentives: “Kansas offers among the most generous property tax abatements and investment tax credits across most firm types, yet these incentives seem to have little impact on the state’s rankings for new operations.”
It’s also useful to compare Kansas to our neighbors. The comparison is not favorable for Kansas.
The record in Wichita
Earlier this year Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for 2013. Its efforts, in its own words, “represent a projected 1,117 new jobs.”
This report shows us that power of government to influence economic development is weak. GWEDC’s information said these jobs were for the geographical area of Sedgwick County. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2013 was 242,744 persons. So the jobs created by GWEDC’s actions amounted to 0.46 percent of the labor force. This is a vanishingly small fraction. It is statistical noise. Other economic events overwhelm these efforts.
The report by the Tax Foundation helps us understand one reason why the economic development efforts of GWEDC, Sedgwick County, and Wichita are not working well: Our tax costs are too high.
While economic development incentives can help reduce the cost of taxes for selected firms, incentives don’t help the many firms that don’t receive them. In fact, the cost of these incentives is harmful to other firms. The Tax Foundation report points to this harm: “While many state officials view tax incentives as a necessary tool in their state’s ability to be competitive, others are beginning to question the cost-benefit of incentives and whether they are fair to mature firms that are paying full freight. Indeed, there is growing animosity among many business owners and executives to the generous tax incentives enjoyed by some of their direct competitors.”
It seems in Wichita that the thinking of our leaders has not reached the level of maturity required to understand that targeted incentives have great cost and damage the business climate. Instead of creating an environment in which all firms have a chance to thrive, government believes it can identify firms that are subsidy-worthy — at the exclusion of others.
But there is one incentive that can be offered to all firms: Reduce tax costs for everyone. The policy of reducing tax costs or granting incentives to the selected few is not working. This “active investor” approach to economic development is what has led companies in Wichita and Kansas to escape hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.
Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”
In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas has been pursuing and Wichita’s leaders want to ramp up: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”
In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”
There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.
We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances, except to reduce the cost of government for everyone.
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May 27, 2014
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.
Have you heard of Uber and similar services? Uber says it is “… evolving the way the world moves. By seamlessly connecting riders to drivers through our [smartphone] apps, we make cities more accessible, opening up more possibilities for riders and more business for drivers. From our founding in 2009 to our launches in over 70 cities today, Uber’s rapidly expanding global presence continues to bring people and their cities closer.”
Uber works like this: Riders use their smartphones and the Uber app to request a ride. Drivers — who have undergone an application process and background check — acknowledge the request and pick up the rider. When the dropoff is made, payment is handled through the Uber app.
Being driven by Uber on the Washington Beltway.
My first trip using Uber was from Dulles International Airport to my hotel in downtown Washington, a pretty long trip at nearly 27 miles. My Uber fare was $59.50. While that is expensive, my hotel’s website listed cab fare as $60. A private sedan would be $90, with reservations required.
So it seems like Uber is priced about the same as a regular taxicab. But: There’s a big difference. The Uber fare is all-inclusive. The way I elected to pay with Uber — which I suspect is probably the easiest way — was to store my credit card with the Uber system. As we approached my destination, I asked my driver if I could add a tip through the Uber app. He said no, there’s no need to. As he transferred my luggage to the bellman, it seemed awkward to not offer a tip. But I confirmed with DC natives that’s the way it is with Uber: No tipping.
No tipping! That’s refreshing. I’m tired of cab drivers extorting tips. But you may be asking: What motivates Uber drivers to offer good service? One factor is that customers rate their drivers through the smartphone app. An intriguing factor is that Uber drivers rate their passengers. Also, a customer service representative followed up regarding my trip. Another thing: My drivers seemed to like their job. They took pride in their clean cars and amenities.
And what service it was. There are several levels of Uber service. I used UberX, which is the least expensive. Other Uber services available in some cities include luxury cars or SUVs. The three cars I rode in were a Toyota Prius, a Lexus, and a Volvo. All were impeccably clean — both the cars and the polite drivers. On all three rides I was offered a bottle of water. Two cars had magazines for me to read. One had a bowl of wrapped candy on the seat next to me. Drivers asked if I was comfortable with the setting of the air conditioning. They were not blasting their radios, as has been the case with some of my cab trips.
In short, the service was great. While the Uber fare was the same as what my hotel estimated for a taxi fare, there was an important difference — no tip to the Uber driver. No need for cash, no need for a taxi driver to fumble with an awkward method of accepting credit cards.
A receipt from a trip using Uber. Click for larger version.
And … a neat receipt available on the Uber website or in my email. When I’ve asked a cab driver for a receipt, I’ve received a blank form.
And … I had an estimate of the fare before I requested a driver. In my case, the estimate was $60.00, with the actual fare at $59.50. Remember, no tipping.
Uber in Wichita?
Recently Uber and Lyft (a similar service) started operations in Kansas City, Missouri. Nearly immediately the city council passed additional regulations that make it tougher — or impossible — for these services to operate.
Requesting an Uber driver.
In Wichita, it’s certain that Uber would be in violation of city ordinances. In 2012 the city passed new taxi regulations which erect and enforce substantial barriers to entering the taxicab market. Some of the most restrictive include these: Drivers must work for a company that has a central office staffed at least 40 hours per week; a taxicab company must have a dispatch system operating 24 hours per day, seven days per week; it must have enough cabs to operate city-wide service, which the city has determined is ten cabs; and a supervisor must be on duty at all times cabs are operating.
A dispatch system. That’s 1950s technology. Uber and similar services use smartphones. No dispatcher needed. No central office required. When you request a ride with the Uber app, you see a screen showing the available drivers nearby, along with an estimate of when the driver will arrive. You can watch the driver’s progress towards your pickup location. Can you do that with Wichita’s cab companies with their supervisors and dispatch systems?
Requesting a driver in Wichita using Uber. It’s not available.
Wichita has implemented regulations regarding the hygiene and local knowledge of taxi drivers, enforced by bureaucrats. How is Uber regulated? First, there are the customer ratings, a powerful force. Then, provided with Uber receipts is a map of the route the driver took to deliver riders to their destinations. If riders are concerned that drivers are padding fares by taking roundabout routes, that’s easy to see and resolve, and the Uber dashboard lets riders request a fare review. Can you imagine how difficult that would be in Wichita, to prove that your driver padded your fare or extorted a tip?
Regulation by bureaucrats, or regulation by customers. There’s a difference, and Wichita is served by the least effective, thanks to our city council.
To top it off, while Wichita has regulations regarding the personal hygiene of drivers and the cleanliness of their vehicles, the city fell short in protecting drives from something really important, like violent crime. After the city passed the new regulations, a passenger was raped by a driver. The Wichita Eagle reported “[the driver] shouldn’t have received a taxi license but did because the new change banning registered sex offenders wasn’t communicated to staff members doing background checks on taxi driver applicants, city officials told The Eagle on Friday. The city has fixed the problem that led to the oversight in Spohn’s case, they said.” (See Regulation failure leads to tragedy in Wichita.)
The regulations regarding customer service training were implemented. But the really important regulations? Lack of oversight, says the city. Which leads us to wonder: Who is regulating the regulators? If an Uber driver committed such a crime, the company would undoubtedly be held liable and experience a loss of reputation. But how do we hold city bureaucrats accountable for their regulatory failures?
Going forward
Will Wichita consider relaxing taxicab regulations so that Wichitans might be served by a superior service like Uber? Not likely, I would say. The city council is proud of the new and restrictive regulations. The city is served by three taxi companies, two having the same owner. These companies are likely to lobby aggressively against allowing Uber and similar services in Wichita, just as taxi companies have done in other cities.
Recent discussion about the future of transit in Wichita have not included services like Uber. At last week’s city council meeting Council Member Janet Miller (district 6, north central Wichita) spoke about baby boomers who may soon be aging and either can’t drive, or don’t want to drive. Yet, she said, they have disposable income and want to spend it. These are ideal customers for Uber.
Uber and the like might not be a total replacement for traditional city bus transit. But it could help many people, and it could provided needed competition to the city’s taxicab fleet. But it doesn’t seem likely that we’ll see Uber in Wichita soon, if at all.
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May 26, 2014
Is Wichita chasing class politics to its detriment?
From The Daily Beast, Richard Florida Concedes the Limits of the Creative Class:
Urbanists, journalists, and academics — not to mention big-city developers — were easily persuaded that shelling out to court “the hip and cool” would benefit everyone else, too. … Florida himself, in his role as an editor at The Atlantic, admitted last month what his critics, including myself, have said for a decade: that the benefits of appealing to the creative class accrue largely to its members — and do little to make anyone else any better off. The rewards of the “creative class” strategy, he notes, “flow disproportionately to more highly-skilled knowledge, professional and creative workers,” since the wage increases that blue-collar and lower-skilled workers see “disappear when their higher housing costs are taken into account.” His reasonable and fairly brave, if belated, takeaway: “On close inspection, talent clustering provides little in the way of trickle-down benefits.”
Post by Voice For Liberty.
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May 26, 2014
Questions for the next Wichita city attorney: Number 3
Wichita will soon select a new city attorney. There are a few questions we ought to ask of candidates, such as: Will the next city attorney advise council members to refrain from making decisions worth millions to their friends and significant campaign contributors?
Two years ago as the Wichita City Council prepared to handle the appeal of the award of a construction contract, the Wichita Eagle editorialized that “appearance matters” on city contracts: “There will be an elephant in the Wichita City Council chambers today as Mayor Carl Brewer and the rest of the council formally consider Dondlinger and Sons’ long-shot final appeal of its loss of the contract to build the new airport terminal — the close ties of Brewer and other City Council members to Key Construction, including a letter Brewer wrote last year recommending Key to build the Cabela’s store in northeast Wichita.” (Eagle editorial: Appearance matters on city contracts, July 17, 2012)
The Eagle probably didn’t know at that time what we learned a short while later: There was unusual interest in Michigan about the airport contract decision, and the campaign bank account of Wichita City Council Member Jeff Longwell benefited financially.
On July 16, 2012 — the day before the Wichita City Council heard the appeal that resulted in Key Construction winning the airport contract — John Rakolta, Chairman and Chief Executive Officer of Walbridge and his wife contributed $1,000 to Longwell’s campaign for Sedgwick county commissioner. Walbridge is a Michigan-based construction company that is partnering with Key Construction on the airport job. The contract is worth about $100 million.
Then on July 20, three days after the council’s decision in favor of Key/Walbridge, other Walbridge executives contributed $2,250 to Longwell’s campaign. Key Construction and its executives contributed $6,500 to Longwell’s county commission campaign, and they’ve also been heavy contributors to Longwell’s other campaigns.
It is wrong to accept thousands in contributions from those who benefit directly from your vote. In many states it is illegal. But not in Kansas. Though legal, the timing of these contributions to Longwell’s campaign is indelicate.
The political influence of Key Construction and its partners extends beyond campaign contributions. Mayor Brewer’s personal Facebook profile has a photo album holding pictures of him on a fishing trip with Dave Wells of Key Construction.
Should the Wichita City Council have made the decision on the airport contract? City documents did not indicate whether the hearing was of a quasi-judicial nature, as it is sometimes when the council rules on certain matters involving appeal of decisions made by city authorities. But the council was asked to make decisions involving whether discretion was abused or whether laws were improperly applied.
That sounds a lot like the role of judges. In 2009 the U.S. Supreme Court ruled that, in the words of legal watchdog group Judicial Watch, “… significant campaign contributions or other electoral assistance pose a risk of actual bias. Writing for the majority, Justice Anthony Kennedy said: ‘Just as no man is allowed to be a judge in his own cause so too can fears of bias arise when a man chooses the judge in his own cause.’”
Judicial Watch also noted “The ruling will likely affect judges in 39 states that elect them — including Washington, Texas and California — from presiding over cases in which their campaign contributions could create a conflict of interest. The nation’s judicial code has long said that judges should disqualify themselves from proceedings in which impartiality might reasonably be questioned, but the Supreme Court ruling is the first to address hefty election spending.”
The mayor and council members are not judges. But they were asked to make a judge-like decision. If held to the same standards as the U.S. Supreme Court says judges must follow, Mayor Brewer and the five council members who accepted campaign contributions from Key Construction should not have participated in the decision on the Wichita airport construction contract. A similar argument can be made for city manager Robert Layton and all city employees. Directly or indirectly they serve at the pleasure of the council.
Question: Did the outgoing city attorney advise the mayor and council members on this topic? We’ll probably never know due to attorney-client privilege. But a good question to ask city attorney candidates is how they would advise council members if another matter like this comes before the council.
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May 26, 2014
It was a little cloudy, so maybe that’s why
Wichita city leaders tell us that the budget and spending have been cut to the bone. Except for the waste, that is.
At 11:27 am, it was a little cloudy and rain threatened. So maybe that’s why these lights were switched on. Or maybe not — other similar lights and streetlights nearby were not lit.
The lights illustrated in this photograph are, undoubtedly, a small portion of the city’s spending. But you don’t have to look very hard to find waste like this, and we know that small examples of waste are multiplied many times. So when city leaders tell us that there is nowhere left to cut in the budget, that everything that can be done to trim the fat has already been done, and that the only thing we can do is raise taxes — well, think of this photograph and others illustrated in In Wichita, the streetside seating is illuminated very well, In Wichita, the rooftops are well-lit and On a sunny day in downtown Wichita you can see the street lights.
This is not to say that waste like this does not occur in the private sector. Of course it does. But businesses and individuals have a powerful incentive to avoid waste that isn’t present in government: Businesses and people are spending their own money.
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May 24, 2014
Pyle, Kansas Senator, considering Roberts challenge
Kansas Senator Dennis Pyle (@Dennis_Pyle) is considering challenging Pat Roberts (@SenPatRoberts) and Milton Wolf (@miltonwolfmd) for the Republican Party nomination for United States Senator from Kansas.
As suspicious as I am regarding the motivations of politicians, I didn’t think of this until a few political observers suggested it: Could this be an effort by the Roberts campaign to muddy the waters and diminish Wolf’s prospects? Or was this an organic decision made by Pyle — after “months of prayer,” of course? Or did Roberts campaign operatives butter up the northeast Kansas Senator and seduce him with the possibility of a U.S. senate seat — or, at least keeping it in the hands of Roberts?
The latter seems about right. But I don’t really know.
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May 23, 2014
Intrust Bank Arena: Not accounted for like a business
Proper attention given to the depreciation expense of Intrust Bank Arena in downtown Wichita recognizes and accounts for the sacrifices of the people of Sedgwick County and its visitors to pay for the arena. It’s a business-like way of accounting, but a well-hidden secret.
The true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters promote a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and hides the true economics of the arena. What’s missing is depreciation expense.
An example of the incomplete editorializing comes from Rhonda Holman of the Wichita Eagle, who opined “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.”
Earlier reporting on this topic in the Eagle did not mention depreciation expense, either.
There are at least two ways of looking at the finance of the arena. Most attention is given to the “profit” (or loss) earned by the arena for the county according to an operating and management agreement between the county and SMG, a company that operates the arena.
This agreement specifies a revenue sharing mechanism between the county and SMG. For 2103, the accounting method used in this agreement produced a profit of $705,678, to be split (not equally) between SMG and the county. The county’s share, as Holman touted, was $255,678. Presumably that’s after deducting the cost of producing an oversize check for the television cameras.
While described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America.”
That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.
A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2013 Comprehensive Annual Financial Report for Sedgwick County. This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially at Sedgwick County in 2013. In that respect, it is a report card of our ability to manage our financial resources.”
Regarding the arena, the CAFR states:
The Arena Fund represents the activity of the INTRUST Bank Arena that opened on January 9, 2010. The facility is operated by a private company; the county incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any. The Arena had an operating loss of $4.7 million. The loss can be attributed to $5.3 million in depreciation expense.
Financial statements in the same document show that $5,295,414 was charged for depreciation in 2013, bringing accumulated depreciation to a total of $21,190,280.
Depreciation expense is not something that is paid out in cash. Sedgwick County didn’t write a check for $5,295,414 in depreciation expense. Instead, depreciation accounting provides a way to recognize and account for the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.
But some don’t recognize this. In years past, Commissioner Dave Unruh made remarks that show the severe misunderstanding that he and almost everyone labor under regarding the nature of the spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”
Intrust Bank Arena commemorative monument
The contention of Unruh and other arena boosters such as the Wichita Eagle editorial board is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) on the arena is merely a historical artifact, something that happened in the past, something that has no bearing today. There is no opportunity cost, according to his view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds.
Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct in that depreciation expense is not a cash expense that affects cash flow, it is an economic fact that can’t be ignored — except by politicians, apparently.
We see our governmental and civic leaders telling us that we must “run government like a business.” Without frank and realistic discussion of numbers like these and the economic facts they represent, we make decisions based on incomplete and false information.
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May 23, 2014