Voice For Liberty

Category: Sedgwick county government

  • Sedgwick County Commissioner to present on sustainable development

    This Friday (February 17th) Sedgwick County Commissioner Richard Ranzau will make a presentation regarding sustainable development, particularly the Regional Economic Area Partnership (REAP) and its participation in an agreement with U.S. Department of Housing and Urban Development Office of Sustainable Housing And Communities.

    Sustainable development, sometimes called “smart growth,” is an effort to increase government’s ability to plan many areas of the economy and the personal lives of citizens. In a letter to commissioners, Sedgwick County Manager Bill Buchanan wrote that the grant will “consist of multi-jurisdictional planning efforts that integrate housing, land use, economic and workforce development, transportation, and infrastructure investments in a manner that empowers jurisdictions to consider the interdependent challenges of economic prosperity, social equity, energy use and climate change, and public health and environmental impact.”

    In his paper, Ranzau wrote: “Proponents of these grants often speak in general terms that make it difficult to disagree. But as they say, the devil is in the details. It is very important for you to know what they are not telling you. We all need to look beyond the fancy talk and find out what the agenda is really about. … The intent of this paper is to share information and insight about ‘sustainable development’ so that citizens and elected officials can have a more complete understanding of what the planning grants will entail and what possible consequences our communities may face if these policies are implemented.”

    Ranzau’s written presentation on this topic may be found at Sustainable planning: The agenda and details.

    Ranzau will present as part of the Wichita Pachyderm Club’s regular Friday luncheon meeting. The public is welcome and encouraged to attend Wichita Pachyderm Club meetings. The meeting starts at noon in the Wichita Petroleum Club on the top floor of the Bank of America Building at 100 N. Broadway (north side of Douglas between Topeka and Broadway). The cost of the meeting is $10, which includes a buffet lunch. For more information click on Wichita Pachyderm Club.

  • Wichita Intrust Bank Arena profit, in perspective

    Last week the Sedgwick County Commission heard a report from county managers regarding the financial performance of the Intrust Bank Arena. The arena, located in downtown Wichita, is owned by the county.

    The main facts are that revenue and profits are down. A Wichita Eagle article holds more details about the numbers.

    What citizens need to know is this: The honeymoon is over. The promised boost to downtown that arena backers promised has yet to materialize in any broad sense. When it does poke through — an example being the Ambassador Hotel — it requires many millions of taxpayer subsidy.

    But perhaps most important is the realization that county leaders are not being honest with its citizens. The “profit” shown by the arena is not reckoned using anything like businesses use, or even most branches of government, for that matter. As explained in the following article from last August, Sedgwick County doesn’t recognize the large capital investment made by citizens to build the arena. Instead, it treats that sacrifice as having no relevance to the economics underlying the arena.

    On top of that, the profit statement presented to commissioners is accompanied by this qualification, which the county does not explain to citizens: “[These statements 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.”

    Intrust Bank Arena depreciation expense ignored

    By Bob Weeks

    Reports that income earned by the Intrust Bank Arena is down sharply has brought the arena’s finances back into the news. The arena, located in downtown Wichita and owned by Sedgwick County, is deemed to be a success by the county and arena boosters based on “profit” figures generated during its first year of operations. But these numbers are not an honest assessment of the arena’s financial performance.

    When the numbers were presented to Sedgwick County commissioners this week, commission chair Dave Unruh said that he is “pleased that we we still are showing black ink.”

    He then 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.”

    The contention of Unruh and other arena boosters 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 and that has no bearing today. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds.

    Since it is only one year old, presumably the arena could be sold for something near its building cost, less an allowance for wear and tear. If not, then the county has a lot of explaining to do as to why it built an asset that has no market value.

    But even if the arena has no market value — and I suspect that in reality it has very little value — it still has an economic cost that must be recognized, that cost being the sales tax collected to pay for it. While arena boosters dismiss this as past history, the county recognizes this cost each year, and will continue to do so for many years.

    The county, however, doesn’t go out of its way to present the complete and accurate accounting of the arena’s cost. Instead, the county and arena boosters trumpet the “profit” 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. Based on the terms of the agreement, Sedgwick County received payment of $1,116,442 for the 2010 year. While described as profit by many — and there was much crowing over the seemingly large amount — 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.

    Commissioner Karl Peterjohn has warned that these figures — and the monthly “profit” figures presented to commissioners — do not include depreciation expense. That expense is a method of recognizing and accounting for the large capital cost of the arena — the cost that arena boosters dismiss.

    In April Sedgwick County released that depreciation number in its 2010 Comprehensive Annual Report. The number is pretty big: $4.4 million, some four times the purported “earnings” of the arena.

    Any honest accounting or reckoning of the performance of Intrust Bank Arena must take this number into account. Unruh is correct in that this depreciation expense is not a cash expense that affects cash flow. That cash was spent during the construction phase of the arena.

    But depreciation expense provides a way to recognize and account for the cost of long-lived assets like buildings over their lifespan. It recognizes and respects the investment of those who paid the sales tax. When we follow standard practices like recognizing the cost of capital assets through depreciation expense, we’re forced to recognize that there’s a $4.4 million gorilla in the room that arena boosters don’t want to talk about.

    Using information about arena operations contained in the operations report, we can construct what an actual income statement for the arena would look like, following generally accepted business principles. According to the statement, total operating income for 2010 was $7,005,224. Operating expenses were $4,994,488. Subtracting gives a figure of $2,010,736. This number, however, is not labeled a profit in the report. Instead, the report calls it “Increase in Net Assets Arising from Operating Activities Managed by SMG.”

    An accounting of profit would have to subtract the $4.4 million in depreciation expense. Doing that results in a loss of $2,389,264. This — or something like it — is the number we should be discussing when assessing the financial performance of Intrust Bank Arena.

    Fiscal conservatives — and sometimes even liberals — often speak of “running government like a business.” But here’s an example of conservative government leaders ignoring a basic business principle in order to paint a rosy picture of a government spending project.

    Without honest discussion of numbers like these, we make decisions based on incomplete and false information. This is especially important as civic leaders agitate for another sales tax or other taxes to pay for more public investment. The sales pitch is that once the tax is collected and the assets paid for, we don’t need to consider the cost. They contend, as is the attitude of Unruh and arena boosters, that we can just sweep it under the rug and pretend it doesn’t exist. This is a false line of reasoning, and citizens ought not to be fooled.

  • Sedgwick County commissioners vote Democratic

    This morning the Sedgwick County Commission voted to select member Tim Norton of Haysville as chairman for the upcoming year. Norton, a Democrat, received the votes of two of the board’s four Republican members: Those of outgoing Chairman Dave Unruh and Jim Skelton.

    Commissioner Karl Peterjohn nominated Richard Ranzau for the position, but he received only two votes.

    It may be remarkable that a board with a four to one majority in one party elected a member of the minority party to serve as chair, or it may simply be a reflection of the actual ideological makeup of the board. Peterjohn and Ranzau consistently take stances and make votes that favor limited government and free markets, while Unruh and Skelton generally join with the politically-liberal Norton on most issues. The chairman is more than just a ceremonial position, as the chairman presides over commission meetings. On many agenda items, the commission is not obligated to hear testimony from citizens, although it must when there are items that have public hearings required by law. It was the practice of Kelly Parks and Peterjohn, when they served as chair, to allow anyone who appeared at meetings to speak. In his term as chair, Unruh was seen as less accommodating, although I think that anyone who really cared to was allowed to speak, sometimes with a gentle admonition to hurry along. It is unknown in what manner Norton will run the meetings while he is chair. A hint: He’s objected to the term “ObamaCare” as pejorative, so I wouldn’t use that word around the courthouse.

    For Chairman Pro Tem, the commissioners selected Skelton. Ranzau’s name was placed into nomination by Peterjohn, and he received the same two votes as he did for chairman. The votes for Skelton by Norton and Unruh are surprising. Skelton’s recent behavior has been erratic, even bizarre at times. His recent appearance at the Wichita City Council (video here) brought laughter and guffaws from both the bench and the public. I got the sense, however, the people were laughing at Skelton, not with him.

    Unruh’s selection for 2011 Chairman’s award

    Chairman Unruh selected Visioneering Wichita as the recipient of the annual Chairman’s award. This organization is in favor of government intervention into the economy — and people’s lives — on a large and increasing scale. Most of the items on its legislative agenda involve more government spending. While Visioneering — its chair Jon Rolph, anyway — denies advocating for increased taxes, Milton Friedman has taught us that it is the level of spending that is the true measure of the size of government. The size of that Visioneering seeks to expand.

  • In Wichita, Southfork TIF is politics, and therefore should be rejected

    Last month the Wichita City Council approved the formation of a TIF district in south Wichita. Known as the Southfork TIF District, the developer is Wichitan Jay Maxwell. This week the matter will appear before the Sedgwick County Commission, as it may, under law, decide to veto the formation of the district.

    Maxwell himself rarely appears at meetings of governmental agencies, sending his agent Tim Austin of Poe & Associates, Inc. instead.

    The role of politics

    Maxwell and Austin have some queer ideas regarding the nature of markets and politics. In an email message to supporters of the Southfork TIF, Austin wrote: “There are many underlying political winds working against the Southfork TIF.” In another email message, he wrote: “As I mentioned previously, there are underlying political interests at play that appear to be making this a political matter as opposed to a vote the merits of the TIF, the project, and South Wichita.”

    Austin has it exactly backwards. It is he who is arguing for using the political process to enrich himself and Maxwell. Those such as myself and Americans for Prosperity who oppose government interventions such as this are arguing against using the political process — against making this a political matter, that is.

    The supporters of government intervention such as TIF often make claims of “market failure.” They claim that the free market system has failed to deliver what they want, so they make appeals to government to intervene. This, of course, moves society away from markets and civil society and toward the politics that Austin seems to disdain.

    In reality, markets do quite well in allocating the resources of our economy, despite the claims of many, including historians who should know better. There are those who may feel they’re not getting everything they deserve through the market process, but that’s no reason to introduce the tremendous inefficiencies and distortions that the political process brings with it. In his book How Capitalism Saved America: The Untold History of Our Country, From the Pilgrims to the Present, Thomas J. DiLorenzo explained:

    Most historians also uncritically repeat the claim that government subsidies were necessary to building America’s transcontinental railroad industry, steamship industry, steel industry, and other industries. But while clinging to this “market failure” argument, they ignore (or at least are unaware of) the fact that market entrepreneurs performed quite well without government subsidies. They also ignore the fact that the subsidies themselves were a great source of inefficiency and business failure, even though they enriched the direct recipients of the subsidies and advanced the political careers of those who dished them out.

    Political entrepreneurs and their governmental patrons are the real villains of American business history and should be portrayed as such. They are the real robber barons.

    The idea of “market failure” is used by the promoters of this TIF district — as do supporters of TIF districts. They claim that only government — that is, politics — can make things right, at least according to their vision.

    The idea that there are two classes of entrepreneurs — market and political — is explained by Helen Cochran in her book review of The Myth of the Robber Barons: A New Look at the Rise of Big Business in America by Burton Folsom. Cochran wrote:

    According to Folsom, “political entrepreneurs” are those that seek government/taxpayer subsidy, public private partnerships, protective tariffs, special privileges, etc. Folsom makes a sound case that economic development fueled by political intervention invariably fails and undermines the very ideology it purports to serve.

    On the other hand “market entrepreneurs” are those that obtain their successes by producing a product that is better and of more value to the consumer, unbridled by the government controls and restrictions that come with subsidy. No one can argue that it is the market entrepreneurs that create the wealth in this country.

    The essence of political entrepreneurship is that Austin and Maxwell find it easier to convince a majority of the Wichita City Council, and now the Sedgwick County Commission, of the superiority of their plans than it is to convince others through the market process. They want to replace the collective knowledge of free people trading voluntarily in markets with the political process — that is, with the judgments of bureaucrats and politicians.

    Do TIF districts work?

    In deciding whether TIF districts “work” we must come to an agreement of what “work” means. Generally, most supporters of TIF — besides the obvious motivations of the developers who are directly enriched by them — claim increased development and jobs.

    But there’s plenty of evidence to the contrary.

    As far as increased development: Yes, that generally happens within the TIF district. But what about the overall city? The answer is that TIF is harmful.

    Regarding the effect of tax increment financing (TIF) districts on economic development, economists Richard F. Dye and David F. Merriman have studied the issue extensively. Their paper The Effects of Tax Increment Financing on Economic Development bluntly states the overall impact of TIF: “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not.”

    Later in the same paper the authors conclude: “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.” More on their work is at Tax increment financing (TIF) and economic growth.

    Others may support TIF for its purported positive impact on employment. Sure, it’s easy to drive by a TIF district and see people at work. But that doesn’t tell the whole story.

    One person who looked at the effect of TIF on employment in the entire city is economist Paul F. Byrne. He concluded this: “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.”

    More on his work is at Does tax increment financing (TIF) deliver on its promise of jobs?

    So considering the high-minded goals of politicians and bureaucrats, we must conclude that TIF does not meet the goals of increased development and/or jobs, if we consider the impact on everyone. What we’re left with is the well-known problem that public choice economics — the economics of politics — has described: Concentrated benefits and dispersed costs. It’s the reason why those who seek enrichment at Wichita City Hall and other governments make so many political campaign contributions.

    This particular TIF district

    In a document prepared for Sedgwick County Commissioners by the county’s Finance Division, this TIF district is analyzed.

    One startling conclusion: “The Southfork area qualifies for TIF funding because most of the land is in a flood plain, and while action is being taken to reduce the magnitude of this problem most of the land will remain in a flood plain after those actions are completed.” (emphasis added)

    In other words, one of the “noble” actions of the developer — fixing a flooded area — is exposed for what it is.

    Another conclusion of the analysis is that the “Proposed project is economically feasible without county funding support.” In other words, the TIF district is not financially necessary.

    Then: “Proposed private equity funding is insufficient to effect default risk.”

    Finally: “Costs to county government are greater than benefits to county government. If, as appears possible based on the financial projections provided for county review, the project is financially feasible without TIF funding, then a substantial cost to county government is the property tax revenue diverted unnecessarily to the project.”

    This directly contradicts the claims that most TIF supporters make: That TIF is without cost. Randal O’Toole and others have shown the many ways in which TIF does have a great cost. His essay “TIF is not free money” may be read as part of my article Tax increment financing: TIF has a cost.

    This particular applicant

    We also need to look at the characteristics of this applicant. The Wichita Business Journal reported this regarding a company Mr. Maxwell owned:

    Pixius proposes to repay, over a 10-year period, $1.3 million of a $6.4 million loan from the U.S. Department of Agriculture’s Rural Utilities Service, according to court documents. The loan was part of a 2002 Farm Bill pilot program that loaned more than $180 million to ISPs to expand Internet service to rural areas.

    “To my memory … Pixius is the only one (to receive a loan) that’s had to file bankruptcy to work out of its situation,” says Claiborn Crain, USDA spokesman.

    When the government helped out Maxwell in the past, it cost taxpayers $5.1 million. His company is set apart from other similar companies in that, according to the USDA spokesman, only Maxwell’s declared bankruptcy.

    I suggest that Maxwell has had his turn at the government funding trough. Taxpayers can’t afford to give him another.

  • Kansas PEAK program: corporate welfare wrapped in obfuscation

    Whether one agrees with the effectiveness and wisdom of government involvement in local economic development, there’s one thing that’s certain: facts and understanding are in short supply.

    An illustration of how confusing things can get was provided last Wednesday at a meeting of the Sedgwick County Commission. Aviation manufacturer Bombardier LearJet was seeking a small part of a larger incentive package from the county. The county was being asked to contribute $1 million, but the overall package Bombardier is seeking is worth $52.7 million. That’s the entire cost of the Wichita portion of the project.

    A large part of the package Bombardier is seeking is based on the Promoting Employment Across Kansas (PEAK) program. Administered by the Kansas Department of Commerce, the program allows qualifying companies to retain 95 percent of the state income withholding taxes their employees pay.

    It’s a roundabout method of distributing corporate welfare that allows companies — and gullible or self-serving politicians — to pretend as though this program has no cost, or that companies are in fact investing their own money.

    In the present case, Bombardier LearJet plans to obtain $27.0 million through this program. It’s described in a company presentation as “Initial State of Kansas Bond Issuance.” They call it that because the State of Kansas will issue bonds that LearJet will buy. That makes it seem that Bombardier LearJet is actually contributing something of their own.

    This misconception might be reinforced in a dialog between John Dieker, vice president of strategic projects for Bombardier Learjet, and Sedgwick County Commissioner Jim Skelton. Skelton was perhaps trying to counter my testimony earlier in the meeting. I had wondered if Bombardier LearJet was contributing even one dollar of their own funds to the project.

    Skelton asked Dieker “Where is this money coming from?”

    Dieker replied “We have the incentives we got from the state at $27 million. We have the interest that throws off since corporate bought the bonds, that’s corporate money that’s going back into the project, so that’s $6 million.

    Skelton asked “So the corporation did buy the bonds?”

    The answer was “Yes, corporation bought the bonds.”

    Skelton concluded: “Well that’s your … I would consider that your money, sir.”

    Dieker didn’t dispute Skelton’s conclusion. He should have.

    Here’s how this financing works, in this case: The state issues $27 million in bonds and sells them to Bombardier Learjet. At this moment, LearJet holds bonds (both an asset and a liability) worth $27 million. The state’s balance sheet hasn’t changed.

    Going forward is where Bombardier LearJet benefits. In the normal course of affairs, the bonds would be repaid out of the company’s cash flow. But under the PEAK program, the bonds are repaid by its employees, through the tax withheld on their paychecks.

    The benefit to LearJet is that it has to pay these taxes, but it manages to be the exclusive beneficiary. Normally these taxes go to fund the operations of Kansas state government. But under the PEAK program, these tax payments go right back to Learjet and are used to pay off the liability of the bonds. The tax payments never benefit the state, as do tax payments from almost all other companies in Kansas. (Bombardier is not the only company benefiting from PEAK.)

    Bombardier is even counting the interest on these bonds as part of their capital contribution to the project. The interest, however, is also being paid by employee withholding taxes, at no cost to the company.

    So did Bombardier LearJet contribute $27 million of its own money, as Skelton claims? When the entire economic transaction is considered, the answer is absolutely not.

    If you’re not convinced by this argument, simply ask: why would Bombardier LearJet engage in such a transaction if it didn’t benefit them?

    Schemes like this call into question one of the the fundamental principles of taxation: that the proceeds be used to fund the operations of government, not to enrich one particular person or company. But continually, chasing economic development dreams, states and local government concoct schemes like PEAK — and others like tax increment financing (TIF) districts, Community Improvement Districts (CIDs), rebates of hotel guest taxes, revenue bonds of various forms, and other monstrosities — that turn over a public function to benefit private interests.

  • Bombardier Learjet should pay just a little

    In a presentation made to economic development officials, aviation manufacturer Bombardier LearJet speaks with pride of its investment in Kansas. But for the present project before the Sedgwick County Commission today, it appears that the company is planning to make no investment at all.

    Bombardier LearJet financing plan. Later the document states “Requesting State of Kansas support to help find gap of $16M.”

    Taking the total project cost of $52.7 million and subtracting the government funding already secured, there is a gap of $16.1 million. Instead of being grateful for the $36.6 million in subsidy already (or about to be) secured, the company is asking for more: Bombardier LearJet is asking the State of Kansas to fund this gap.

    What happened to capitalism?

    What happened to companies funding even a portion of their capital requirements?

    The proponents of economic development incentives often make their case that the incentives are just a “sweetener” to secure the deal. But in the present case with Bombardier LearJet, local governments — the City of Wichita, Sedgwick County, and the State of Kansas — are being asked to pay for the entire meal.

    We in Kansas and Sedgwick County are already doing much for Bombardier LearJet. It is likely that we will agree to let LearJet forgo paying any property tax at all — the same property taxes that other business struggle to pay. These businesses compete with LearJet for labor and other things they need.

    The State of Kansas is allowing the income taxes of Lear Jet employees to be used for the exclusive benefit of that company.

    Both of these actions call into question the fundamental question of fairness in taxation: that all pay their fair share. When companies like the applicant company ask to be excused from the burden of taxation, others have to pay.

    If you are not persuaded by this appeal to principle, there is evidence that chasing the big catch is often counterproductive, and that the net economic effect of these deals is overestimated. One study finds: “Large-employer businesses have no measurable net economic effect on local economies when properly measured.”

    Perhaps the worst thing we take away from this episode is that our state is making no progress towards a concept developed by Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business. He has made a convincing case that Kansas needs to move away from the “active investor” approach to economic development. This is where government decides which companies will receive special treatment, be it in the form of tax abatements, tax credits, grants, and other forms of subsidy. This is what we are doing with the present applicant, Bombardier LearJet.

    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.”

    Later, Hall writes this regarding “benchmarking” — the bidding wars for large employers we are considering today: “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.”

    We need to move away from economic development based on this active investor approach. This commission needs to advocate for policies — in this chamber, at Wichita City Hall, and at the Kansas Statehouse — that lead to sustainable economic development. What we’re doing today is not sustainable.

    A small and reasonable step towards this goal is to ask Bombardier LearJet to consider paying just $1 million themselves on a project with a cost of $52.7 million.

  • Johnson Controls loan not needed

    Tomorrow the Sedgwick County Commission will consider making a forgivable loan in the amount of $42,500 to Johnson Controls.

    A forgivable loan means that the county immediately pays the loan principle to the company. Then, if performance goals are met over the next five years in this case, the county forgives a portion of the loan each year. At the end of five years the company will owe the county nothing, if the criteria are met.

    Economically, the forgivable loan is equivalent to a grant of money subject to meeting performance criteria. In this case, the criteria consists of maintaining a certain level of employment.

    Johnson is a very large company, with 137,000 worldwide employees and a profit of $1,540,000,000. So this is not a small company, or a startup company, or a company that lacks for money, or a company that isn’t successful. Its stock has far outperformed leading market indexes over the past ten years. The City of Wichita approved a forgivable loan for the same amount.

    The harm of crony capitalism

    The harm of economic development programs like this is that when the city, county, and state make them available, companies will take advantage of them. Evidently companies find it’s easy to persuade this state and this commission to grant them money.

    At least easier than it is to raise equity, where you have to trade shares of ownership for money. Or in debt markets, where you have to pay interest and principal.

    This behavior creates a self-fulfilling feedback loop. Company A sees what Companies B, C, D, E, F (and so on …) have received from the city, county, and state, and they want it too. Soon we may find ourselves in the situation where few companies will consider Wichita and Sedgwick County without some form of handout.

    But the real harm that these programs do is the destruction of civil society. By that I mean a society that respects individuals and property rights, and where people trade harmoniously with others through markets. This includes companies attempting to raise investment capital, like the applicant company today.

    Instead, we replace a civil society and market entrepreneurship with political entrepreneurship, and with all the negatives that accompany that.

    If we in Sedgwick County are looking to distinguish ourselves, let’s start today by rejecting crony capitalism as our economic development tool.

    The proposal document

    The proposal document delivered to Johnson Controls by the Kansas Department of Commerce was written by a business consultant in Hoffman Estates, Illinois. This naturally leads to the question: can’t someone in Kansas do this work? A Department of Commerce official explained that the department has several consultants “on the ground in the markets they serve” to better work with clients in their markets. The Department believes this work can be done at lower cost and with greater flexibility this way.

    Second, the Department of Commerce document includes as part of the incentive package an item labeled “Personal Property Tax Exemption” with a value of $1,143,563. Other incentives are valued at $1,168,000, for a total of $2,311,563.

    Interestingly, when this proposal came before the Wichita City Council, the value of the state incentives was given as $1,168,000. In its presentation, Wichita officials didn’t include the personal property tax exemption in the value of the deal.

    There’s good reason for that. The $1,168,000 represents incentives crafted specifically for Johnson. But the personal property tax exemption is available to anyone, as the porposal document later explains. Kansas hasn’t taxed this type of property since 2006.

    So whether to include the value of this tax savings as an incentive is open to question. The Department of Commerce says that since not all states offer this tax exemption, it is an advantage that Kansas can offer. It’s the type of advantage that Kansas ought to create more of, as it is something that applies equally to all companies, not just to those who apply and fit into state-developed criteria. This represents the state acting as a caretaker of a level competitive playing field, rather than as an active investor in specific companies. (The other incentives, the $1,168,000 is the state acting as active investor.)

    What is most troubling about this forgivable loan and the state incentive package is that it isn’t necessary in this case. Commissioner Richard Ranzau participated in a tour of the Johnson facility, and he says that company officials said the jobs were coming to Wichita no matter what, in Ranzau’s assessment.

    And in response to a question by Commissioner and Chair Dave Unruh as to where else the jobs could go, Ranzau reported the answer was that Wichita is the only place that made sense.

    So the obvious question is: Why are we spending money on these subsidies when the company already has planned to move the equipment and jobs to Wichita?

    Conflict of interest

    Another issue involving the proposed forgivable loan to Johnson is the fact that, according to Ranzau, Commissioner Jim Skelton’s brother works for Johnson.

    Under Kansas law, this fact alone does not establish a conflict of interest. Sedgwick County, apparently, does not have a code of ethics that covers situations like this.

    CityEthics.org has a model ethics code that cities and counties might adopt. It states: “An official or employee may not use his or her official position or office, or take or fail to take any action, or influence others to take or fail to take any action, in a manner which he or she knows, or has reason to believe, may result in a personal or financial benefit, not shared with a substantial segment of the city’s population, for any of the following persons or entities …”

    The code goes on to define sibling as a member of the class of persons to which this code applies.

    If the county had a code of ethics like this, Commissioner Skelton would not be able to participate or vote on this matter. So while Kansas law does not require Skelton to step aside for this item, he certainly could do so on his own initiative, and he should.

  • Sedgwick County considers a planning grant

    This week the Sedgwick County Commission considered whether to participate in a HUD Sustainable Communities Regional Planning Grant.

    A letter from Sedgwick County Manager Bill Buchanan to commissioners said that the grant will “consist of multi-jurisdictional planning efforts that integrate housing, land use, economic and workforce development, transportation, and infrastructure investments in a manner that empowers jurisdictions to consider the interdependent challenges of economic prosperity, social equity, energy use and climate change, and public health and environmental impact.”

    The budget of the grant is $2,141,177 to fund the three-year plan development process, with $1,370,000 from federal funds and $771,177 of “leveraged resources” as a local match. These leveraged resources are in the form of in-kind contributions of staff time, plus $60,000 in cash.

    While Sedgwick County will be the grant’s “fiscal agent,” the work will be done by Regional Economic Area Partnership (REAP), an umbrella organization with the mission of, according to its website: “Guide state and national actions that affect economic development in the region and adopt joint actions among member governments that enhance the regional economy.”

    REAP’s members include city and county governments in a nine-county area in south-central Kansas. One of its duties is to administer the Kansas Affordable Airfares Program, the program that pays subsidies to airlines to provide service to the Wichita airport. In 2011, Sedgwick County paid $15,272 in “assessments” for its membership in REAP, while the City of Wichita paid $27,192. Governments pay smaller amounts as part of REAP’s water resources program.

    The counties that are considering participating in this planning grant are Reno, Harvey, Sedgwick, Sumner, and Butler.

    County documents specify the county’s in-kind contribution as $120,707. That consists of portions of the salary and benefits for four existing employees, plus $85,800 in “indirect administration costs.” There is no cash match at this time.

    John Schlegel, Director of Planning for the Wichita-Sedgwick County Metropolitan Area Planning Department, told commissioners that the end product of this grant would be the development of a regional plan for sustainable development. He said that we don’t know what the plan would contain, but that the purpose of the grant program is to get regions to work together on sustainability issues. The target area of the grant is a five-county area around Sedgwick County.

    He said that examples of issues would be economic development, workforce development, fiscal sustainability such as balanced budgets and spending priorities, and working together to create efficiencies in the region like joint purchasing and cost sharing.

    Commissioner Richard Ranzau asked to see a copy of the completed application, but the application is not complete.

    In his remarks, Ranzau described the application process, reading from the application document: “The applicant must show a clear connection between the need that they have identified within the region, the proposed approach to address those conditions, and the outcomes they anticipate the plan will produce.” He said that it appears that REAP will do these within the application, but the commission is being asked to approve and commit to these items without having seen them, which he described as irresponsible. He made a motion that action on the grant be delayed until these things are known.

    Joe Yager, chief executive officer of REAP, said that last year’s grant application is available on the REAP website, and that is the closest thing to a draft application that is available today. This year’s application is a second year of the program. Last year the commission voted not to participate in the grant by a 3 to 2 vote.

    Commissioner Karl Peterjohn wondered if the new planning consortium is a duplication of existing regional authorities. He listed seven different groups, besides REAP, that are involved in planning for the region.

    In further remarks, Peterjohn was concerned that smaller counties will have the same voting representation as Sedgwick County, which is many times larger than the small counties.

    In response to a question from Peterjohn, Yager said that the current application is for category 1 funds only, which are for planning purposes. If REAP is successful in the application, it could apply for category 2 funds, which are for implementation of a plan.

    Answering another question, Yager said that “livability principles,” which applicants must be committed to advance, are providing more transportation choices, promoting equitable and affordable housing, enhancing economic competitiveness, supporting existing communities, coordinating policies and leveraging investments, and valuing communities and neighborhoods. Peterjohn said these principles were not supplied in the information made available to commissioners.

    Peterjohn said these principles sound innocuous on their face, but when details are examined, he said he could not support a “Washington-driven agenda” that could not pass the present Congress. He described this effort as part of an “administrative end-around,” baiting us with a federal grant, that will allow Washington, HUD, and EPA to “drive what we do in our community.”

    The motion on deferring the item failed on a 2 to 3 vote, with Peterjohn and Ranzau voting for it.

    The commission heard from three citizens. In his remarks, John Todd referenced a slide titled “Common Concerns” from a presentation given by REAP. Todd listed these concerns, which include: “A method of Social Engineering to restrict residence in the suburbs and rural areas and force Americans into city centers; a blueprint for the transformation of our society into total Federal control; will enforce Federal Sustainable Development zoning and control of local communities; will create a massive new ‘development’ bureaucracy; will drive up the cost of energy to heat and cool your home; will drive up the cost of gasoline as a way to get you out of your car; and will force you to spend thousands of dollars on your home in order to comply.”

    Susan Estes of Americans for Prosperity challenged the attitude of some commissioners, particularly Jim Skelton, which is that approving the planning grant does not commit us to implementing the plan. She told the commissioners “If you know you don’t like the federal government coming in and planning for you, say so now. Let’s get it over with and be upfront and honest to those involved,” referring to the other cities and counties that may participate in the grant and planning process.

    She characterized the language that appears in the grant materials as meaning “more control and less liberty.”

    In his remarks, Ranzau asked Schlegel what problem we will solve by participating in the grant. Schlegel answered that the purpose of the grant is to “build the greater regional capacity for regions to better compete in what is really becoming a global marketplace.” This is the end product, he said.

    Ranzau said that we don’t need more planning, that we have more than enough planning at the present time. This grant, he said, would create another consortium that is unaccountable to the people, as no one is elected to them. The organizations receive tax dollars, and while some elected officials serve on these bodies, it is not the same as being directly accountable to the people. The fact that the grant requires a new consortium to be formed is evidence that the agenda is to circumvent the will of the people, he said.

    Ranzau also said that Schlegel told him that “acceptance of this grant will take REAP to another level, because right now they are struggling, and this will help plot the course for REAP.” He said that REAP, which is housed at the Hugo Wall School of Public Affairs at Wichita State University, needs to expand its role and authority in order to give it “something to do.” He said the grant will promote the “progressive agenda” of the Obama administration in this way.

    Later Commission Chair Dave Unruh disputed the contention regarding the workload of REAP.

    Ranzau also questioned whether we want the federal government to be a “source of solutions” for our local communities. He also questioned one of the stated goals of the program, which is to reduce cost to taxpayers. It’s a new program, he said, and would not reduce the cost to taxpayers.

    He further questioned the ability of the grant program to help teach local communities to be fiscally responsible. With federal spending out of control, he said the federal government is not in a position to help in this regard.

    He further said that talking in generalities sounds benign, and that he wanted to know what he is committing the county to this year. Repeating the concerns of Peterjohn, Ranzau said that accepting this grant would be accepting the policies of the Obama Administration as our own. He said that in the 2010 elections the people repudiated the agenda of the president, and this grant program is an example of the type of programs people have said they don’t want. It is concern with the agenda behind this grant program that is his greatest concern, he later explained.

    Continuing, Ranzau questioned the ability of the federal government to create conditions for sustainable growth: “You’ve got to be kidding me. Look at the vision they now have for growth in this county. It’s a disaster. And now they want to take the same policies that have created and made our current economic situation worse — they want to bring them to our local communities by these sorts of grants.”

    Both Ranzau and Peterjohn questioned the ability of this grant to produce affordable housing, citing the government’s role in the ongoing housing crisis.

    Ranzau, who has voted against many grants, added that this is the “the worst and most troublesome grant” he’s seen in his time in office, adding that the grant is clearly an agenda created by President Obama. He said there are politicians who ran for office on platforms of limited government and fiscal responsibility, and this grant is an opportunity for them to “act on those values.”

    In further discussion, it was brought out that each region makes its own definition of what sustainability means to it, but Yager provided this definition of sustainability: “Meeting the needs of the present without compromising the ability of future generations to meet their own needs.”

    In his remarks, Unruh said that Sedgwick County has been involved in sustainability thinking and planning for at least two years. He said this is a strategy that helps the county plan for the future. He asked manager Buchanan if the county had a definition of sustainability. Buchanan replied the County has taken a similar approach to the International City/County Management Association, which he said involves four factors: Economic stability — sufficient jobs and economic development; ensuring that local governments are fiscally healthy so that they can provide quality services; social equity, which he said ensures that the delivery of services in communities is equitable; and the environment, which he said was not about global warming, but rather making sure we’re not wasting natural resources.

    Unruh said that we are not opposed to these principles, that these are reasonable activities for elected officials. He added that regionalism is the “whole measuring stick.” We must consider communities close to us when planning, he added. It is reasonable to get these people together on a voluntary and non-binding basis. While he said he didn’t like excess spending at the federal level, it is his money that the federal government is spending, and we should take advantage of this program, adding that we need to plan. If the plans are not acceptable, he said we could simply not adopt them. He disagreed with the contention of Ranzau and Peterjohn that this process causes the county to yield to any master plan developed by the federal government. He again mentioned that we are using our money to develop this plan, and asked our federal officeholders to stop spending money in this way.

    He added that he believes in limited government and fiscal responsibility, and that accessing these resources does not make him “hypocritical, insincere, or untruthful.”

    In rebuttal to Buchanan, Ranzau said that the grant funding document says that one of the goals is to reduce greenhouse gas emissions, which are believed by many to be a cause of global warming or climate change. The document does mention helping regions “consider the interdependent challenges of … energy use and climate change.” This language was transmitted to commissioners in a letter from Buchanan. Ranzau again said it is important not to downplay the agenda that is associated with the grant funds. In earlier remarks, Ranzau had described how applications would be scored or ranked, and that winning applications would need to conform to the goals of HUD.

    The commission voted to approve the grant, with Unruh, Norton, and Skelton voting in favor, and Ranzau and Peterjohn voting against.

    Commentary

    Discussions such as these, where the role of government and the nature of the proper relationship between the federal government and states, counties, and cities, are a regular feature at Sedgwick County Commission meetings, due to the concerns of Peterjohn and Ranzau. These discussion do not often take place at the Wichita City Council, unless initiated by citizens whose testify on matters.

    The remarks of chairman Unruh illustrated one of the important conundrums of our day. Many are opposed to the level of federal (and other government) spending. Polls indicate that more and more people are concerned about this issue. Yet, it is difficult to stop the spending.

    In particular, the grant process is thorny. The principled stand of Ranzau, and sometimes Peterjohn, is that we should simply refuse to participate in the spending — both federal and local — that grants imply, and in the process also accepting the strings attached to them. Others, Unruh and Skelton in particular, have what they believe is a pragmatic view, arguing that it is our money that paid for these grant programs, and so by participating in grants we are getting back some of the tax funds we send to Washington. This reasoning allows Unruh to profess belief in limited government and fiscal responsibility while at the same time participating in this spending.

    But there is no doubt that accepting federal money such as these grant funds means buying in to at least parts of the progressive Obama agenda, something that I think conservatives like Unruh and Skelton would not do on a stand-alone basis. This is an example of the power and temptation of what appears to be “free” federal money, and Ranzau and Peterjohn are correctly concerned and appropriately wary.

    It is even more troublesome to realize that this power over us is exercised using our own money, as Skelton and Unruh rightly recognize, but nonetheless go along.

    There may be a legislative solution someday. First, we can elect federal officials who will stop these programs. But the temptation to bring money back to the home district, either through grant programs or old-fashioned pork barrel spending, is overwhelming. Just this week U.S. Senator Jerry Moran, who voted against raising the debt ceiling in August, pledged to find more federal funds to pay for Wichita’s aquifer storage and recovery program.

    An example of legislation that may work is a bill recently introduced by U. S. Representative Mike Pompeo of Wichita and others. The bill is H. R. 2961: To amend the Patient Protection and Affordable Care Act to have Early Innovator grant funds returned by States apply towards deficit reduction. The purpose of the bill is to direct the early innovator grant funds that Kansas Governor Sam Brownback returned towards deficit reduction, rather than being spent somewhere else.

    The fiscal conservatives who vote to accept federal grant funds should be aware of research that indicates that these grants cause future tax increases. In my reporting on such a study I wrote: This is important because, in their words, “Federal grants often result in states creating new programs and hiring new employees, and when the federal funding for that specific purpose is discontinued, these new state programs must either be discontinued or financed through increases in state own source taxes.” … The authors caution: “Far from always being an unintended consequence, some federal grants are made with the intention that states will pick up funding the program in the future.”

    The conclusion to this research paper (Do Intergovernmental Grants Create Ratchets in State and Local Taxes?) states:

    Our results clearly demonstrate that grant funding to state and local governments results in higher own source revenue and taxes in the future to support the programs initiated with the federal grant monies. … Most importantly, our results suggest that the recent large increase in federal grants to state and local governments that has occurred as part of the American Recovery and Reinvestment Act (ARRA) will have significant future tax implications at the state and local level as these governments raise revenue to continue these newly funded programs into the future. Federal grants to state and local governments have risen from $461 billion in 2008 to $654 billion in 2010. Based on our estimates, future state taxes will rise by between 33 and 42 cents for every dollar in federal grants states received today, while local revenues will rise by between 23 and 46 cents for every dollar in federal (or state) grants received today. Using our estimates, this increase of $200 billion in federal grants will eventually result in roughly $80 billion in future state and local tax and own source revenue increases. This suggests the true cost of fiscal stimulus is underestimated when the costs of future state and local tax increases are overlooked.

    The situation in which we find ourselves was accurately described by economist Walter E. Williams in his recent visit to Wichita. As I reported: “The essence of our relationship with government is coercion,” Williams told the audience. This, he said, represents our major problem as a nation today: We’ve come to accept the idea of government taking from one to give to another. But the blame, Williams said, does not belong with politicians — “at least not very much.” Instead, he said that the blame lies with us, the people who elect them to office in order to get things for us. A candidate who said he would do only the things that the Constitution authorizes would not have much of a chance at being elected.

    The further problem is that if Kansans don’t elect officials who will bring federal dollars to Kansas, it doesn’t mean that Kansans will pay lower federal taxes. The money, taken from Kansans, will go to other states, leading to this conundrum: “That is, once legalized theft begins, it pays for everybody to participate.”

    We face a moral dilemma, then. Williams listed several great empires that declined for doing precisely what we’re doing: “Bread and circuses,” or big government spending.

  • Intrust Bank Arena depreciation expense ignored

    Reports that income earned by the Intrust Bank Arena is down sharply has brought the arena’s finances back into the news. The arena, located in downtown Wichita and owned by Sedgwick County, is deemed to be a success by the county and arena boosters based on “profit” figures generated during its first year of operations. But these numbers are not an honest assessment of the arena’s financial performance.

    When the numbers were presented to Sedgwick County commissioners this week, commission chair Dave Unruh said that he is “pleased that we we still are showing black ink.”

    He then 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.”

    The contention of Unruh and other arena boosters 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 and that has no bearing today. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds.

    Since it is only one year old, presumably the arena could be sold for something near its building cost, less an allowance for wear and tear. If not, then the county has a lot of explaining to do as to why it built an asset that has no market value.

    But even if the arena has no market value — and I suspect that in reality it has very little value — it still has an economic cost that must be recognized, that cost being the sales tax collected to pay for it. While arena boosters dismiss this as past history, the county recognizes this cost each year, and will continue to do so for many years.

    The county, however, doesn’t go out of its way to present the complete and accurate accounting of the arena’s cost. Instead, the county and arena boosters trumpet the “profit” 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. Based on the terms of the agreement, Sedgwick County received payment of $1,116,442 for the 2010 year. While described as profit by many — and there was much crowing over the seemingly large amount — 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.

    Commissioner Karl Peterjohn has warned that these figures — and the monthly “profit” figures presented to commissioners — do not include depreciation expense. That expense is a method of recognizing and accounting for the large capital cost of the arena — the cost that arena boosters dismiss.

    In April Sedgwick County released that depreciation number in its 2010 Comprehensive Annual Report. The number is pretty big: $4.4 million, some four times the purported “earnings” of the arena.

    Any honest accounting or reckoning of the performance of Intrust Bank Arena must take this number into account. Unruh is correct in that this depreciation expense is not a cash expense that affects cash flow. That cash was spent during the construction phase of the arena.

    But depreciation expense provides a way to recognize and account for the cost of long-lived assets like buildings over their lifespan. It recognizes and respects the investment of those who paid the sales tax. When we follow standard practices like recognizing the cost of capital assets through depreciation expense, we’re forced to recognize that there’s a $4.4 million gorilla in the room that arena boosters don’t want to talk about.

    Using information about arena operations contained in the operations report, we can construct what an actual income statement for the arena would look like, following generally accepted business principles. According to the statement, total operating income for 2010 was $7,005,224. Operating expenses were $4,994,488. Subtracting gives a figure of $2,010,736. This number, however, is not labeled a profit in the report. Instead, the report calls it “Increase in Net Assets Arising from Operating Activities Managed by SMG.”

    An accounting of profit would have to subtract the $4.4 million in depreciation expense. Doing that results in a loss of $2,389,264. This — or something like it — is the number we should be discussing when assessing the financial performance of Intrust Bank Arena.

    Fiscal conservatives — and sometimes even liberals — often speak of “running government like a business.” As an example, Unruh’s campaign website from last year states “… as a business owner he works hard to apply good business principles to County government …”

    But here’s an example of conservative government leaders ignoring a basic business principle in order to paint a rosy picture of a government spending project. Unruh is not alone in doing this.

    Without honest discussion of numbers like these, we make decisions based on incomplete and false information. This is especially important as civic leaders agitate for another sales tax or other taxes to pay for more public investment. The sales pitch is that once the tax is collected and the assets paid for, we don’t need to consider the cost. They contend, as is the attitude of Unruh and arena boosters, that we can just sweep it under the rug and pretend it doesn’t exist. This is a false line of reasoning, and citizens ought not to be fooled.