Press coverage of new Wichita baseball team majority owner Lou Schwechheimer.
We don’t know much about the ownership team of the new Wichita baseball team, led by majority owner Lou Schwechheimer. But here’s a look at some of the press coverage from November 2015, when Schwechheimer was announced as part of the new owners of the New Orleans Zephyrs AAA minor league baseball team (later renamed the Baby Cakes).
The New Orleans Times-Picayune contributed this quote: 1
“Our goal is to make the New Orleans Zephyrs one of the top franchises in all of Minor League Baseball. With the great South Louisiana fans, the love of sports here and our hard work, we have every reason to believe that we will succeed,” Schwechheimer said.
“New Orleans will be in the top tier of attendance, because this is a great town. This is a resilient town. This is a magical town. … I can promise you this ballpark will come alive. We will provide first class family entertainment where families can come out with their kids, where grandparents can bring their grandkids to their first game, where young couples can go on their first date. It’ll be a family place. We only ask the fans in New Orleans one thing: just come once. Let us earn your trust one time and I promise you’ll be back.”
The news organ of minor league baseball reported this: “Our goal is to make the New Orleans Zephyrs one of the top franchises in all of Minor League Baseball,” Schwechheimer said. “With the great South Louisiana fans, the love of sports here, and our hard work, we have every reason to believe that we will succeed.” 2
In 2016, local media reported this: “Schwechheimer, announced Monday as manager and controller of a company that has bought 50 percent of the New Orleans Zephyrs, said that type of diligence, dedication and now experience will be used to turn around this city’s Triple-A team.” 3
In 2018, at least a few people in New Orleans weren’t happy with Schwechheimer’s plans to move the team to Wichita: “Relocating the Baby Cakes to Wichita, a city with one-third the market of New Orleans would be in many ways the final act of betrayal by owner Lou Schwechheimer. First, Schwechheirmer changed the team name from the Zephyrs, which New Orleans embraced, to the Baby Cakes. The name is loathed by most in the New Orleans area.” 4
An unhappy fan submitted this letter to The Times-Picayune:5
The Babycakes were never committed to New Orleans
After only two years, the cleat finally dropped. The organization that owns the team formerly known as the Zephyrs is decamping New Orleans for the friendlier and far more lucrative confines of a new ballpark in Wichita, Kan. Hope they come up with a catchy nickname.
This group of carpetbaggers from New England were on their way out the door the day they walked into New Orleans. They clearly demonstrated their utter lack of regard for this community and for the game of baseball when they adopted the most demeaning, the most nonsensical and the least authentic nickname they could have come up with. It wasn’t even a part of our community’s well-known idiosyncratic idiom.
Sure, they sold tons of merchandise the first year, then in only two years presided over the dissolution of a quarter of a century of AAA baseball in a major league market. That was no accident. To demonstrate how bush league these guys are, they didn’t even sew the logo or the numbers — much less player names — on their jerseys. They simply printed the shirts. Even Little League teams have numbers and team names sewn on.
The New Orleans Times-Picayune also reports that the Baby Cakes will be leaving before the end of the team’s stadium lease: “The New Orleans Baby Cakes have filed an application to relocate the team to Wichita, Kansas, according to the Louisiana Stadium and Exposition District. The LSED said in a release Thursday (Sept. 6) the team is expected to stay until the expiration of the lease through the 2021 season. The Wichita Eagle reports the city hopes to have a team in place by 2020. That would make 2019 the final season for the Cakes in the New Orleans market.” 6 Minutes of the October 25, 2018 meeting of LSED confirm that the lease runs through 2021. 7 This means the Baby Cakes, if playing in Wichita in 2020 as planned, will have left New Orleans with two seasons remaining on the lease.
A surprise deal that has been withheld from citizens will be considered by the Wichita City Council this week.
Wichitans were probably surprised to learn Sunday that the city plans to sell land near the new baseball stadium to the owners of the new baseball Wichita team.
Surprised for several reasons: First, while the city completed an agreement with the new team last year, the land sale was not disclosed to the public. There appears to be no prior public mention of this.
Second, the city plans to sell land for $1 per acre.
Third: While the Wichita Eagle reported this story Sunday 1 We might have known as early as Friday, except that city council agendas were not available due to a website problem. The website was fixed Monday afternoon.
Here’s what the agenda packet holds for item V-3, titled “Private Development Agreement with Wichita Riverfront LP (District IV).”
“As part of the City’s effort to attract affiliated baseball to Wichita and secure development activity to help pay for the stadium STAR and TIF bonds, the City extended the invitation for interested team ownerships to have development opportunities surrounding the stadium. The New Orleans’s team ownership did express that as a requirement for their interest in Wichita they required development rights around the stadium.”
This is the first time the city has revealed that development opportunities surrounding the stadium were a requirement of the baseball team deal.
From the agenda: “City grants the Developer exclusive right to purchase the Private Development Site for the development of the hospitality, commercial, retail, office and residential uses, as contemplated herein, for $1.00 an acre.”
How much land at one dollar per acre? Earlier, the agenda holds this: “The City owns approximately 24 acres at the former Lawrence Dumont Stadium site. After securing the final footprint of the stadium site, adjacent streets, infrastructure and riverfront enhancements, it is estimated that the remaining property available for private development will be 4.25 acres.” (The Eagle article reported the sale would be 24 acres, but the agenda contradicts that.)
It is troubling that the city has not been forthright in sharing this with us before now. Besides the agenda, the Eagle reported this:
“It goes back to the partnership that we have worked out with the team,” said Scot Rigby, assistant city manager and director of development services, whose department came up with the agreement.
“That’s where we struck that agreement on the value of the ground. For the city, we’ve already owned that property,” he said. “If we didn’t do anything with it, it would be undeveloped property. So the value for us is to get it in development as quickly as possible.”
Also, from the Eagle:
Having the baseball team expand its operations from baseball to real estate along the river has been part of the plan since talks started between the team owners and city officials about three years ago, and it played a major role in attracting the team to Wichita, officials with the city and the team said.
“We needed a team that played the level of baseball that was attractive for the community and important in terms of affiliated baseball at the Triple-A level. But we also wanted a team that could deliver on the development,” Layton said.
Why didn’t the city feel it could share that with us at the time the deal was struck for the team to move to Wichita?
There’s also this. We don’t know much about the ownership team, led by Schwechheimer. At least some in New Orleans weren’t happy with his plans to move the team from there to Wichita: “Relocating the Baby Cakes to Wichita, a city with one-third the market of New Orleans would be in many ways the final act of betrayal by owner Lou Schwechheimer. First, Schwechheirmer changed the team name from the Zephyrs, which New Orleans embraced, to the Baby Cakes. The name is loathed by most in the New Orleans area.” 2
More troubling is this: Schwechheimer bought the New Orleans team in 2016. At the time, local media reported this: “Schwechheimer, announced Monday as manager and controller of a company that has bought 50 percent of the New Orleans Zephyrs, said that type of diligence, dedication and now experience will be used to turn around this city’s Triple-A team.” 3
The Eagle reports this: “Having the baseball team expand its operations from baseball to real estate along the river has been part of the plan since talks started between the team owners and city officials about three years ago, and it played a major role in attracting the team to Wichita, officials with the city and the team said.”
If all this reporting is true, talks about moving the team from New Orleans started in 2016, the same year Schwechheimer purchased the team and said he would use “diligence” and “dedication” to turn around the New Orleans team.
That’s something to think about. Is this a reliable person?
Also: The $1 per acre reminds us of other $1 dollar deals the city has crafted. In 2012, the city leased land it owned in Waterwalk for $1 per year for 93 years. There were apartments built, but the city did not follow through on an important part of the deal. 4 Other developments in Waterwalk were leased for $1 per year. 5
In these instances, apartments and a hotel were built. But in general, Waterwalk has been a dismal failure, and in recent years its fortunes have declined farther.
In 2011 the city decided to build a parking garage downtown with retail space. It leased 8,500 square feet of that space to Dave Burk for $1 per year. Much of that space has remained vacant since it was built.
Can’t we see some progress on these projects before the city does it again?
Then, these developers are from out-of-town, like — dare I say — the Minnesota Guys. At one time the toast of the town, their multi-count criminal indictment for securities fraud is on appeal to the Kansas Supreme Court on a jurisdictional matter. Other than that, they left a trail of broken promises and bad debts in downtown Wichita.
For these reasons — a surprise announcement that has been withheld from citizens, a broken website, repeating a pattern that hasn’t been successful — we need to take at least a few weeks to mull over this deal.
Then, there’s this: In the agenda packet, section 6.03 of the development agreement holds this surprise: “The 1% City sales tax has been approved at an election, and the City agrees that the City sales tax revenues generated within the STAR Bond District will be committed to pay the principal and interest of the STAR Bonds.”
I have no idea what this means. But how did this appear in an official city document and an agreement with a developer?
The Wichita economy saw jobs lost in 2017, but improved last year. Job growth is expected to trend slightly higher in 2019, buoyed by manufacturing and professional services. We anticipate the Wichita economy to expand this year, but grow at slower rate than the U.S. and the majority of metro areas. Business/consumer optimism and aerospace demand should help power the local economy; however, trade issues, commodity prices, lack of skilled labor, and slow population growth will likely limit growth in southeast Kansas.
There’s not much good news in this forecast, except that job growth is expected to grow rather than decline as it did two years ago. So we have to wonder why the mayor retweeted — presumably approvingly — this grim forecast.
Responding to a different forecast of job growth in Wichita for 2019, Scot Rigby, who is Assistant City Manager, Director of Development Services for the City of Wichita, tweeted “great news.” But that forecast is as gloomy as the Intrust forecast, with job growth expected to be about half the national rate. See Job growth in Wichita: Great news?
Generally, Wichita officials are pleased with the local economy (Former Wichita City Council Member Pete Meitzner: “We have enjoyed great progress and growth during my two terms as a City Council member and I plan to do my part to assure Sedgwick County is part of this continued success.”) But the available statistics are grim and are improving only slowly. See Growing the Wichita economy.
If Wichitans don’t read beyond the rosy headlines and tweets from the mayor and city officials, they will be uninformed, and unfortunately, misinformed by people we should be able to trust.
The Wichita Eagle editorial board notices problems with a survey gathering feedback on Century II.
What will we learn from a survey gathering public opinion on the future of Century II in downtown Wichita? Not much, according to a Wichita Eagle editorial. 1
The editorial presents evidence from an expert indicating the survey will produce results that “will be neither scientifically valid nor representative of the city as a whole.” The problems lie with the nature of the questions and self-selected participants unlikely to be representative of the city.
I commend the editorial board for bringing this issue to our collective attention. It’s important, and not unprecedented in Wichita. If we look beyond this survey, we’ll find other examples of the same:
In 2014 the city was quite proud of its engagement and positive response regarding the proposed city sales tax. But on election day, 62 percent of voters said no to the tax.
In 2013 the city established a website and program called “Activate Wichita.” It was a virtual town hall where citizens and officials could propose ideas and collect feedback. But as I showed, when using the voting system there was no option for expressing disagreement or disapproval with an idea. “Neutral” was as much dissent as Wichitans could express in this system.
The cost of fixing an oversight in the design of Naftzger Park in downtown Wichita is rising, and again we’re not to talk about it, even though there are troubling aspects.
Last week the Wichita City Council was scheduled to consider an item regarding the rebuild of Wichita City Council. That item was removed from the agenda the day before the meeting. It now appears on the agenda for the February 12 meeting, and with a higher price tag.
(“Consider” is not quite the right term, as the item was on the council’s consent agenda. That’s where items are passed in bulk, usually without discussion.)
As the city explains in the agenda packet for this week, “Naftzger Park currently has a small pond that acts as a storm water retention facility during rain events. Proposed improvements to Naftzger Park will eliminate the pond and all available storm retention. The project does not include funding for replacing the retention capacity.” The cost is given as $115,000, up from last week’s $85,000.
As explained last week, this seems like a major oversight in the original project plans. The city has regulations regarding stormwater retention that private sector developers must follow. Didn’t any city planners consider these regulations as the project was planned? Didn’t any council member or bureaucrat look at the plans and wonder about stormwater drainage? Wasn’t there a highly-regarded architect designing the park? What about TGC Development, the developer of the surrounding property, to whom the city effectively outsourced the development of Naftzger Park? The construction manager?
Of note: This week the agenda tells us this: “Funding is available for transfer due to the scope of project being adjusted to remove some the structural repairs and the abutment treatment after discussion with the railroad were not successful.” This sounds like structural repairs were planned but not executed. This deserves discussion, but with the item being on the consent agenda, discussion is not likely.
Of further note: The February 5 agenda stated, “Funding is available for transfer due to underruns of bid items upon project completion and favorable bid pricing.” This made it sound like all planned work was completed and the city spent less than budgeted, even if through happenstance. This week we’re being told something different.
An incentive program in Wichita should cause us to question why investment in Wichita is not feasible without subsidy.
At its February 5, 2019 meeting, the Wichita City Council will consider an item regarding economic development in Delano. The owner of a building there has applied for financial assistance under the city’s facade improvement program.
The purpose of the facade improvement program, according to city documents, is to provide “low-cost loans and grants” to help improve the appearance of buildings “located in defined areas needing revitalization, including the City’s core area.”
The matter before the council this week is to accept the petition of the property owner and set February 19, 2019 for the public hearing.
Undoubtedly council members will praise the property owner for deciding to invest in Wichita. I’m glad he is, and it sounds like the project will improve the Delano area. But the need for this item raises a few questions regarding public policy in Wichita that are more important than any single project.
First, city documents state: “The Office of Economic Development has reviewed the economic (‘gap’) analysis of the project and determined there is a financial need for incentives based on the current market.” In other words, the city has determined that this project is not economically feasible unless it receives a government subsidy. Will any council members ask why is it not possible to renovate a building in the core of Wichita without subsidy? What factors in Wichita — specifically Delano — make it impossible to have investment like this without subsidy?
Second: Wichita officials, especially Wichita Mayor Jeff Longwell, tell us that the city doesn’t use cash as an economic development incentive. But this proposal includes a cash grant of $30,000. This is not a low-cost loan that must be repaid. Instead, it is an incentive, a gift — and it’s cash.
The cost of the Naftzger Park makeover is rising, will be paid for with borrowed funds, and possibly handled without public discussion.
The cost of the Naftzger Park project in downtown Wichita is rising, according to an item the Wichita City Council will consider at its Tuesday February 5, 2019 meeting. According to city documents, an additional $85,000 is needed for stormwater retention, a function the former pond provided.
This seems like a major oversight in the original project plans. The city has regulations regarding stormwater retention that private sector developers must follow. Didn’t any city planners consider these regulations as the project was planned? Didn’t any council member or bureaucrat look at the plans and wonder about stormwater drainage? Wasn’t there a highly-regarded architect designing the park? What about TGC Development, the developer of the surrounding property, to whom the city effectively outsourced the development of Naftzger Park? The construction manager?
The extra cost is proposed to come from savings realized in another nearby project. That requires a waiver of policy, according to the agenda: “Staff requested waiver of City Council Policy No. 2 regarding the use of projects savings to allow this transfer of funds.”
On top of that, this money will be borrowed. An accompanying resolution (number 19-048) provides the authorization: “Section 2. Project Financing. All or a portion of the costs of the Project, interest on financing and administrative and financing costs shall be financed with the proceeds of general obligation bonds of the City.”
Borrowing this money, even though it is a small amount, is a significant public policy issue. The city decided to use tax increment financing (TIF) to pay for this project. City officials pitch this as a method of financing that costs the general public nothing, as the TIF bonds are repaid from a project’s future property taxes.
In this case, as the surrounding development by TGC starts to pay higher property taxes, these taxes would be used to pay for Naftzger Park. (Never mind who pays for the public services the development will consume.)
But now, some expenses of the project have been shifted away from TIF to the general city.
The equitable way of handling this is to charge this expense to the TIF district. Either that, or to the responsible parties whose oversight, we now see, was lacking.
By the way, this item is on the consent agenda, meaning there will be no discussion unless a city council member requests the item to be “pulled” for discussion and a potentially separate vote. (A consent agenda is a group of items that are voted on in bulk with a single vote. An item on a consent agenda will be discussed only if a council member requests the item to be “pulled.” If that is done, the item will be discussed. Then it might be withdrawn, voted on by itself, or folded back into the consent agenda with the other items. Generally, consent agenda items are considered by the city to be routine and non-controversial, but that is not always the case.)
Following, an excerpt from the February 5, 2019 city council agenda:
Background: Naftzger Park currently has a small pond that acts as a storm water retention facility during rain events. Proposed improvements to Naftzger Park will eliminate the pond and all available storm retention. The project does not include funding for replacing the retention capacity.
Analysis: With the elimination of the existing pond, underground on-site storage is necessary to prevent a negative impact on the area storm sewer system and the surrounding developments during rain events.
Financial Considerations: Currently, the Stormwater Utility does not have funding available for these improvements. Staff proposes transferring $85,000 in General Obligation bond funding from the Douglas Underpass project. Funding is available for transfer due to underruns of bid items upon project completion and favorable bid pricing. Staff requested waiver of City Council Policy No. 2 regarding the use of projects savings to allow this transfer of funds. The total budget for the stormwater retention facility would be $85,000 and the revised budget for Douglas Underpass would be $2,015,000.
Wichita city leaders will latch onto any good news, no matter from how flimsy the source. But they ignore the news they don’t like, even though it may come from the U.S. Census Bureau, U.S. Bureau of Labor Statistics, or U.S. Bureau of Economic Analysis.
In his media briefing today, Wichita Mayor Jeff Longwell cited an article promoting the purportedly recession-proof and growing Wichita-area economy. 1
Based on the article 2 Longwell cited Wichita’s low unemployment rate and growing job count.
One quote from the article highlights Wichita’s low unemployment rate: “In 2018, the city saw unemployment fall to 3.5 percent — the lowest it’s been since May 1999.” Here’s some data regarding this claim:
In the table, we see that the unemployment rate (monthly average) for 2018 is nearly unchanged from 1999. Also nearly unchanged for these 19 years are the civilian labor force and number of jobs. Both values are slightly lower now. This is not “steady job growth.”
The article the mayor relies upon doesn’t reflect the economic reality in Wichita. It isn’t even close. Yet the mayor and other city officials have heavily promoted this article on social media.
Mayor Longwell also said, “We want to celebrate some of our successes because it has not been easy to get here and it’s been very intentional, and the things that we’re doing that help make Wichita a great place to live but more importantly a place where we can ride out a potential recession that may hit the rest of the country at some point in time and we think that’s a great place for us to be right now.”
Regarding recessions and being “recession-proof:” The usual definition of a recession is two consecutive quarters of declining economic activity as measured by gross domestic product. For the nation, the last recession ended in 2009. For metropolitan areas like Wichita GDP data is not available quarterly. Annual data, however, tells us that since 2011 — well after the end of the last national recession — Wichita has had two separate years in which real GDP declined, 2013 and 2017. 3
That’s like two recessions in Wichita at a time the national economy was growing. Is that recession-proof?
The mayor also presented a forecast that Wichita will add 2,700 jobs in 2019. The source of this forecast is the Center for Economic Development and Business Research at Wichita State University. 4
For the Wichita metropolitan area economy, adding 2,700 jobs in a year represents 0.9 percent job growth. Is that good? Nationally, the economy is expected to continue strong growth, although perhaps slightly slower than in 2018, in which nonfarm jobs grew by 1.8 percent. 5 Nationally, job growth is forecast at 1.7 percent for 2019. 6 Wichita’s forecast rate of 0.9 percent is 53 percent of the national rate — barely more than half.
The nearby chart illustrates that since the end of the last recession, job growth in Wichita has been below job growth in the nation as a whole. 7 Generally, job growth in Wichita has been at about half the rate of the nation. In 2017, Wichita lost jobs. Yet, City of Wichita officials tout “steady job growth.”
It’s not only jobs and output. Personal income has grown only slowly. 8
The Wichita metropolitan area population is growing, but at a rate slower than most metro areas. From 2010 to 2017, the Wichita metro area grew in population by 2.3 percent. For all U.S. metro areas, the population growth was 6.5 percent. Of the 382 metropolitan areas, Wichita ranked 245. Considering just the change from 2016 to 2017, Wichita’s population grew by 0.1 percent, ranking 268 of the 382 metro areas. All U.S. metro areas grew by 0.8 percent over the same period.
For net domestic migration, Wichita experienced a loss of 2.9 percent of its population from 2010 to 2017. This ranked 295 among metro areas. For 2016 to 2017, Wichita lost 0.5 percent, ranking 293, nearly unchanged from the larger earlier period. 9
This slow population growth and out-migration is happening at the same time Wichita-area leaders tell us that we have great momentum going forward. But the data — domestic migration, employment, gross domestic product, and personal income — don’t support what our leaders tell us.
U.S. Bureau of Economic Analysis, Total Real Gross Domestic Product for Wichita, KS (MSA) RGMP48620, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/RGMP48620, January 31, 2019.
The All industry total includes all Private industries and Government. Real GDP by metropolitan area is an inflation-adjusted measure of each metropolitan area’s gross product that is based on national prices for the goods and services produced within the metropolitan area.
Also: U.S. Bureau of Economic Analysis, Real Gross Domestic Product GDPCA, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPCA, January 31, 2019. ↩
Wichita city officials promote an article that presents an unrealistic portrayal of the local economy.
An article promoting the Wichita economy 1 was noticed and promoted by official City of Wichita sources.
A tweet came from the official @CityofWichita Twitter account and reads “We have been named one of the top two recession-proof cities in the nation by @Livability. Wichita was praised for its ability to withstand turbulence in the national economy, steady job growth and the state’s low income-to-debt ratio.” 2
Those who retweeted this include the Wichita Regional Chamber of Commerce, Wichita Economic Dev (“Promoting, building and preserving Wichita’s economic strength to ensure Wichita is the preferred location for new, existing and expanding organizations.”), and Scot Rigby, who is who is Assistant City Manager, Director of Development Services for the City of Wichita. City officials also shared the article of the city’s Facebook page. 3 That post has been shared 169 times.
One quote from the article highlights Wichita’s low unemployment rate: “In 2018, the city saw unemployment fall to 3.5 percent — the lowest it’s been since May 1999.” Here’s some data regarding this claim:
In the table, we see that the unemployment rate (monthly average) for 2018 is nearly unchanged from 1999. Also nearly unchanged for these 19 years are the civilian labor force and number of jobs. Both values are slightly lower now. This is not “steady job growth,” as Wichita officials proclaim.
Regarding jobs, the article states: “In 2019, job growth is predicted to be positive and steady, and the city anticipates adding 2,700 new jobs.” As a source, the article cites an article from KSN News, which states: “For 2019, the job growth is expected to jump modestly by 0.9 percent, meaning 2,700 new jobs are predicted to come to the city.” 4
This is an accurate report of what the WSU forecast said, except it doesn’t come from the Wichita State University School of Business, as the article reports. Instead, the source is the Center for Economic Development and Business Research at Wichita State University. 5
Is 0.9 percent job growth good? Nationally, the economy is expected to continue strong growth, although perhaps slightly slower than in 2018. 6 Nationally, job growth is forecast at 1.7 percent for 2019. 7 Wichita’s forecast rate of 0.9 percent is 53 percent of the national rate.
The nearby chart illustrates that since the end of the last recession, job growth in Wichita has been below job growth in the nation as a whole. Generally, job growth in Wichita has been at about half the rate of the nation. In 2017, Wichita lost jobs. Yet, City of Wichita officials tout “steady job growth.”
It’s not only employment that has been bad news. In 2017 the Wichita economy contracted. 8 Personal income has grown only slowly. 9
We really must wonder what Wichita officials are thinking and where they get their data.
A tweet from a top Wichita city official promotes great news that really isn’t so great.
The @WichitaEconDev Twitter account is managed by Scot Rigby, who is Assistant City Manager, Director of Development Services for the City of Wichita. Its tagline is “Promoting, building and preserving Wichita’s economic strength to ensure Wichita is the preferred location for new, existing and expanding organizations.”
But the Business Journal article didn’t provide any useful context. Once we learn more about what the numbers in the forecast mean, we may want to temper our enthusiasm.
The forecast for Wichita metro area employment in 2019 calls for modest growth of 0.9 percent, according to the Center for Economic Development and Business Research at Wichita State University. 1 This follows growth of 0.8 percent in 2018. 2
Nationally, the economy is expected to continue strong growth. 3
The nearby chart illustrates that since the end of the last recession, job growth in Wichita has been below job growth in the nation as a whole. Generally, job growth in Wichita has been at about half the rate of the nation. In 2017, Wichita lost jobs.
Of Wichita job growth in 2018, the CEDBR forecast notes, “This marked a return to the level of growth experienced in the Wichita area from 2012 to 2016, after experiencing a contraction in overall employment in 2017.” The average annual rate of job growth for those years in Wichita was 0.83 percent. It was 1.82 percent for the nation, which is 2.2 times the rate for Wichita.
CEDBR also notes, “Wichita’s unemployment rate declined throughout 2018 to a low of 3.5 percent in October 2018, the lowest unemployment rate for the area since 1999.” We should note that this decline is primarily due to a declining labor force in Wichita, rather than robust job growth.
Back to Rigby’s tweet: There is good news — Wichita is not forecast to lose jobs, as it has in the recent past.
But the rate of growth seen for Wichita is not robust, and that’s a serious problem, especially when our officials think it’s good.
The city council, however, decided to require the company to pay only $100,000 of that. The city reasoned that because the company is planning an expansion, that would offset the other $153,000 of the clawback.
Wichita Mayor Jeff Longwell described this is holding the company accountable. The Wichita Eaglequoted him as saying, “This is why we’ve done it, to make sure that everyone is accountable and that the taxpayers, at the end of the day, win.”
But despite the mayor’s bluster, the city failed to enforce the agreement it made to protect taxpayers. Instead, the company receives $153,000 in free taxes that it didn’t deserve, along with an interest-free loan of $100,000 amortized over four years.
By the way, the same Eagle article reported: “Fiber Dynamics, a company founded by Darrin Teeter to commercialize technology developed at Wichita State’s National Institute for Aviation Research in the early ‘90s, hasn’t had to pay city property taxes since 2008, an estimated value of more than $500,000.”
Actually, the company didn’t pay any property taxes on the exempted property. That includes county, school, and state taxes.
The unrealized potential of an economic development incentive teaches lessons.
This week the Wichita City Council will consider an amendment to an economic development incentive agreement. 1
In 2008 the city awarded an incentive to a company in the form of exemption from paying property taxes, estimated by the city to be $93,175 annually at the time the incentive was awarded. 2
The incentive was awarded based on the applicant company creating a certain number of jobs and making a certain level of investment. It was rewarded on a five plus five basis, meaning that the city council reviewed the deal after five years. The plan was if the company met goals, the city would extend the incentive for another five years.
At the five-year review, however, the applicant company had not met the job goals. The city invoked an exception that allowed extension of the incentive based on a downturn in the economy as measured by the Wichita Current Conditions Index, which is produced by the Center for Economic Development and Business Research at Wichita State University. 3
Now is the end of the second five-year period. The job goals have not been met, and the city has decided the applicant company is in default of the agreement. The city is proposing a clawback, that is, recovery of the value of the incentive for the second five-year period. According to the agenda packet: “The value of the abated taxes for the second five-years is approximately $253,000. The City Council could clawback the entire amount, or some portion, per the incentive agreement.”
But: The agreement that the council will consider is that the applicant company build an expansion to its facilities at a cost of $2,500,000, using no incentives. Also, the company will repay $100,000 of the abated taxes, in four annual payments of $25,000.
A few things to learn:
First, economic development incentives don’t always work. This reflects the uncertainty of business. When the city presents projections like benefit-cost ratios, it might want to remind us that these values will be achieved only if the project targets are reached. When businesses describe their plans, these are called forward-looking statements. They are accompanied by disclaimers like “subject to risks and uncertainties that could cause actual results to differ materially.” Investors and interested parties are “cautioned not to place undue reliance on these forward-looking statements.” The same cautions hold for citizens of Wichita, as they are the investors paying the cost of incentives and expecting to receive the benefits. That is, after all, the foundation of the benefit-cost analysis that accompanies requests for incentives: That by spending now or by giving up future tax collections, the city receives even more in benefits.
Second, cities often don’t have the fortitude to strictly enforce clawbacks. Here, the company is receiving credit of $153,000 for construction an expansion to its facility, something the company was contemplating anyway. In other words, receiving credit for something it was going to do anyway. This is the usual case. 4
Third, when the city and its officials say we no longer use cash as an incentive, here’s a case where the city canceled $153,000 of debt the city is entitled to, based on its agreement with the applicant company. That’s just like cash.
Bartik, Timothy J. 2018. “‘But For’ Percentages for Economic Development Incentives: What percentage estimates are plausible based on the research literature?” Upjohn Institute Working Paper 18-289. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. https://doi.org/10.17848/wp18-289. ↩
The Wichita City Council seems poised to enter an unnecessarily complicated transaction.
This week the Wichita City Council will consider a loan to the operator of the Starlite Drive-In Theater in Wichita. According to city documents, the proposal is for a five-year loan of $200,000 with an annual interest rate of one percent. The city is requiring both a personal guarantee and a letter of credit, presumably from a reputable bank. 1
We have to wonder why the city asks for both a letter of credit and a personal guarantee. When issuing a letter of credit, a bank will be careful. It is, in effect, making a promise to issue credit to a borrower (the operator of the Starlite) if the borrower does not perform according to the agreement with the city. That alone ought to be enough security.
Moreover, if a bank has enough confidence in a customer to issue a letter of credit for $200,000, it would probably make a loan for the same amount. But that would cost more than one percent in interest.
This is really what the city is doing: Reducing the cost of a loan that a borrower ought to be able to obtain on his own.
Given this, why doesn’t the city simply subsidize the interest cost of the loan? I don’t know what rate a bank would charge this borrower, but it might be 12 percent or so. Then the borrower would have interest costs of $24,000 per year as compared to $2,000 per year for the City of Wichita loan. If the city would simply pay the borrower the difference between the two, things would be much simpler for the city. It wouldn’t have to worry about the loan being repaid.
Well, the city shouldn’t have to worry about repayment, because of the letter of credit. But if the borrower qualifies for that, he can also qualify for a loan.
There are other reasons why the city shouldn’t get involved in the Starlite theater, but if it must, let’s try to keep things simple. Based on what we know so far, I don’t think we’re being told the entire story.
Further evidence of lack of transparency is that this matter has been elevated to an emergency. According to city documents, the mayor will make this declaration regarding the enabling ordinance: “I, Jeff Longwell, Mayor of the City of Wichita, Kansas, hereby request that the City Council declare that a public emergency exists requiring the final adoption and passage on the day of its introduction, to wit, December 18, 2018 …” 2
“The $200,000 loan from the City will be structured to be repaid over five years as an interest only loan with an interest rate of 1% per annum, with quarterly interest payments for the first four years. The borrower will pay one-twelfth of the principal amount plus interest in each month of year five. The borrower is Blake Smith through Starlite, LLC, a Kansas limited liability company. Smith will provide the City with a personal guarantee as well as a letter of credit securing the entire loan. The letter of credit will be structured as a declining letter of credit. If any principal amount of the loan is prepaid, the letter of credit can be reduced by an equal amount. For instance, if $25,000 is paid at the end of year one, the letter of credit may be reduced to $175,000, the remaining balance of the loan.” City of Wichita, Agenda Packet for December 18, 2018. Item V-5. ↩
REQUEST FOR DECLARATION OF EMERGENCY
REQUEST OF THE MAYOR OF THE CITY OF WICHITA, KANSAS, FOR THE DECLARATION BY THE CITY COUNCIL OF SAID CITY OF THE EXISTENCE OF A PUBLIC EMERGENCY REQUIRING THE ADOPTION OF AN ORDINANCE BELOW DESIGNATED.
TO THE MEMBERS OF THE CITY COUNCIL OF THE CITY OF WICHITA, KANSAS:
I, Jeff Longwell, Mayor of the City of Wichita, Kansas, hereby request that the City Council declare that a public emergency exists requiring the final adoption and passage on the day of its introduction, to wit, December 18, 2018 of an ordinance entitled:
ORDINANCE NO. _____
AMENDMENTS TO ORDINANCE 50-585 OF THE CITY OF WICHITA, KANSAS, PERTAINING TO HYATT GRANT PROCEEDS FOR COMMUNITY IMPROVEMENT PROJECTS, GRANTS AND GRANT PROGRAMS
The general nature of such public emergency lies in the need to pass and publish this ordinance to authorize the release of funds for the purchase of special digital projection equipment and for costs related to its installation for Wichita’s Starlite Drive-In, which was recently purchased by an anonymous buyer to prevent its closure.
It is therefore expedient at this time that the City Council find and determine that a public emergency exists by reason of the foregoing and that the above entitled Ordinance be finally adopted on the day of its introduction.
Executed at Wichita, Kansas on this day of December 18, 2018.
MAYOR OF THE CITY OF WICHITA, KANSAS. ibid. ↩
As Wichita prepares to award a large construction contract, let’s hope the city acts in an ethical manner this time.
As the Wichita City Council prepares to make a decision regarding a contract for the new baseball stadium, the council’s past reputation in these matters can’t be overlooked.
The controversy over the stadium contract has been covered by the Wichita Eagle: “The Wichita City Council hasn’t officially approved a design-build team for the city’s new $75 million Minor League ballpark, but there’s already been a protest over the recommended group. … At issue in a protest by a competing team is whether the JE Dunn team meets a key requirement to be selected, which is that it has built at least three similar Major or Minor League ballparks.” 1
The biggest potential for unethical behavior comes from Wichita Mayor Jeff Longwell. In 2012, as the Wichita city council was considering the award of the contract for the new airport terminal, Longwell (then a council member) received campaign contributions from executives of Walbridge, a Michigan construction company partnering with Key Construction to build the new Wichita airport terminal. 2
Two Walbridge contributions were made on July 16, 2012, the day before the council, Longwell included, voted to award the contract to the Key/Walbridge partnership. More contributions from Walbridge arrived on July 20, according to Longwell’s campaign finance reports.
When questioned about the Michigan contributions, Longwell told the Wichita Eagle, “We often get contributions from a wide variety of sources, including out-of-town people.” But analysis of past campaign finance documents filed by Longwell showed just three out-of-state contributions totaling $1,500. 3
In deciding the airport contract issue, the council was asked to make decisions involving whether discretion was abused or whether laws were improperly applied. It’s not surprising that Jeff Longwell made these decisions in favor of his campaign contributors. But he shouldn’t have been involved in the decision.
That was not the first time Jeff Longwell has placed the interests of his campaign contributors ahead of taxpayers. In 2011 the city council, with Longwell’s vote, decided to award Key a no-bid contract to build the parking garage that is part of the Ambassador Hotel project. The no-bid cost of the garage was to be $6 million, according to a letter of intent. Later the city decided to place the contract for competitive bid. Key Construction won the bidding, but for a price $1.3 million less.
It’s not only Longwell with problematic behavior in the past. In 2012, before the vote on the airport contract, executives of Key Construction and spouses contributed heavily to the campaigns of both Wichita City Council Member Lavonta Williams (district 1, northeast Wichita) and Wichita City Council Member James Clendenin (district 3, southeast and south Wichita). These contributions were not known to the public until months after the vote was cast.
Williams is no longer on the council, but Clendenin remains.
The city needs an adult in the room. That person is, or should be, Wichita city manager Robert Layton. In the past he has implemented policies to end the practice of no-bid contracts. We don’t know what will happen this week.
“A campaign finance report filed by Wichita City Council Member Jeff Longwell contains contributions from executives associated with Walbridge, a Michigan construction company partnering with Key Construction to build the new Wichita airport terminal. … These contributions are of interest because on July 17, 2012, the Wichita City Council, sitting in a quasi-judicial capacity, made a decision in favor of Key and Walbridge that will cost some group of taxpayers or airport customers an extra $2.1 million. Five council members, including Longwell, voted in favor of this decision. Two members were opposed.” Weeks, Bob. Michigan company involved in disputed Wichita airport contract contributes to Jeff Longwell. Available at https://wichitaliberty.org/wichita-government/michigan-company-involved-in-disputed-wichita-airport-contract-contributes-to-jeff-longwell/. ↩
“Analysis of Longwell’s July 30, 2012 campaign finance report shows that the only contributions received from addresses outside Kansas are the Walbridge contributions from Michigan, which contradicts Longwell’s claim. Additionally, analysis of ten recent campaign finance reports filed by Longwell going back to 2007 found three contributions totaling $1,500 from California addresses.” Weeks, Bob. Jeff Longwell out-of-town campaign contributions. Available at https://wichitaliberty.org/wichita-government/jeff-longwell-out-of-town-campaign-contributions/. ↩
A Wichita Eagle headline reads “Wichita aircraft supplier plans 45 new jobs with $7.5 million bond request,” but important information is buried and incomplete.
According to the agenda packet for the December 4, 2018 meeting of the Wichita City Council, a local aircraft supplier is “requesting issuance of bonds” worth $7.5 million. 1
Even if you read the entire Wichita Eagle article2 on this matter, you wouldn’t really learn much about this item. You might think the city is lending the company this money, which many people assume is the purpose of the Industrial Revenue Bonds program. But in the IRB program, the city lends no money, nor does it guarantee repayment of the bonds. 3
Instead, the purpose of the IRBs is to convey a tax holiday. In the very last paragraph, the article mentions this property tax abatement, but no dollar value is given, even though the “city documents” presumably used as a source for this story clearly state the dollar values. The sales tax exemption is also mentioned, with no dollar value given. City documents don’t hold that, either.
The value of the tax holiday, according to the city, is estimated at $82,040 annually for up to ten years, shared among local taxing authorities thusly:
City of Wichita: $22,837
State of Kansas: $1,050
Sedgwick County: $20,575
USD 259 (Wichita school district): $37,578
For the value of the sales tax exemption, no value is given. By city documents state the purpose of the bonds is to pay for “$4,000,000 for new machinery and equipment.” Sales tax on that would be $300,000. If the entire $7.5 million is spent on taxable purchases, sales tax savings would be $562,500.
Why doesn’t the Wichita Eagle mention some of these important matters?
The article also holds no mention of the important public policy issues involved. For example, why does the owner of the business want to escape paying the same taxes that (nearly) everyone else must pay? This question is especially pertinent as Kansas is one of the few states in which even low-income households pay the full sales tax rate on groceries.
Perhaps the reason is that the cost of government makes this investment unprofitable. If that is true, we have a grave problem. If the city must issue bonds and create a tax holiday for this rather small investment, we have a capacity problem. A reader on Facebook left this wry comment to the Eagle story: “So, local area population 600,000+ people … About to add 45 jobs over 5 years?”
The city justifies tax giveaways like this by using a benefit-cost analysis. That is, if the city gives up some taxes, it will receive even more in additional taxes. This analysis is useful to politicians and bureaucrats. But the analysis is valid and meaningful only if the investment is impossible without the tax giveaway.
The question then becomes: Is this tax forgiveness necessary? City documents don’t say. Showing necessity is not a requirement of the IRB incentive program. We’re left wondering if the tax expenditure, which is potentially more than one million dollars over ten years, is truly needed.
The city is proud of its requirements that the benefit-cost ratio must be at least 1.3 to 1. But for USD 259, the Wichita school district, the ratio is 1.17 to 1. So the city is pushing an “investment” on the school district that is below the standard it requires for itself. The school district has no say in the matter, based on Kansas state law. Note also that the school district gives up the most tax revenue, 1.6 times as much as the city.
By the way, Wichita Mayor Jeff Longwell says the city is no longer using cash as economic development incentives. But when the city waves a magic legislative wand and says you don’t have to pay $82,040 per year in property tax, how is that different than giving the same amount in cash? Or when the city says don’t bother paying the sales tax on this, how is that different than giving a cash discount?
The answer is there’s no difference. The mayor, city council members, and city bureaucrats hope you won’t notice the sleight of hand, that is, skillful deception. And with the Wichita Eagle being the watchdog, there’s little chance very many people will be informed.
Must the City of Wichita spend its share of Sedgwick County sales tax proceeds in a specific way?
Sedgwick County collects a one-cent per dollar retail sales tax. The county keeps some, then distributes the rest to cities. On Facebook, a question arose regarding how Wichita may spend its share of the sales tax proceeds. Couldn’t some funds that go towards building Kellogg be rerouted to, say, fund the operations of Wichita’s public library system?
A former city council member argued that “As it stands, Wichita cannot spend its allocated portion of that sales tax on anything but roads and bridges.” I posted that there was a Wichita city ordinance that said how the sales tax is to be spent in Wichita, and that ordinance could be modified or canceled. The same former council member admonished me to call a specific person in the city budget office and “he will clarify for you that the City Council doesn’t have the ability to override the Sedgwick County sales tax referendum language.”
I looked for the referendum language. The document is available in Sedgwick County’s election document system. The canvass of the special sales tax election was held on August 2, 1985, and this was reported:
The returns of the election were presented to the Board as received from the official conducting the election on the following proposition:
SHALL THE FOLLOWING BE ADOPTED?
A proposition to enact a countywide retailers’ sales tax in Sedgwick County, Kansas, in the amount of one percent (1%), such tax to take effect on October 1, 1985, pursuant to K.S.A. 1984 Supp. 12-187.
The language of the referendum is silent regarding how the tax revenue may or may not be spent.
There are, however, other considerations. One, according to Mark Manning, the city’s budget officer, is that the city has borrowed money, with proceeds from the sales tax pledged for repayment.
Second, there is a Wichita city ordinance, number 41-185. It pledges half the city’s share of the sales tax towards property tax reduction. Then, it states: “… and pledges the remaining one half of the one percent (1%) of any revenues received to Wichita road, highway and bridge projects including right-of-way acquisitions.” This was adopted on August 25, 1992 and replaced an existing ordinance that said the same.
The 1992 ordinance also holds this, in section II: “It is the specific intent of the Governing Body of the City of Wichita that the City of Wichita continue to use the tax revenues as outlined in this ordinance and that this pledge be continued as a matter of faith and trust between the people and the present and future Governing Bodies of the City of Wichita.”
We often hear that half the city’s share of the sales tax is pledged for Kellogg construction. In actuality it is pledged to “Wichita road, highway and bridge projects.”
But really, it isn’t even pledged to that. The pledge is in the form of a city ordinance. It may be changed at any time at the will of four council members.
Yes, the ordinance says the city intends to continue using the tax revenues in the same way “as a matter of faith and trust.” Unfortunately, that trust has been destroyed in many ways, one being council members who tell us things that aren’t true.
The Wichita City Council will consider approval of a redevelopment plan in a tax increment financing (TIF) district.
This week the Wichita City Council will hold a public hearing considering approval of more tax increment financing (TIF) spending in downtown Wichita. The spending is for the second phase of redevelopment of the Union Station property on East Douglas. According to city documents, the total cost of this phase is $31,000,000, with TIF paying for $2,954,734. 1
This is a pay-as-you-go form of TIF, which means the city does not borrow funds as it would in a traditional TIF district. Instead, the eligible portion of the developer’s property taxes will be rerouted back to the development as they are paid.
The TIF district was established in 2014. The council this week considers a redevelopment plan, which authorizes spending TIF funds on a specific project. Redevelopment plans must be approved by a two-thirds majority of the council. While overlapping jurisdictions like counties and school districts can block the formation of a TIF district, they have no such role in the approval of a redevelopment plan.
Of note, this public hearing is being held after the fact, sort of. City documents state: “A development agreement was approved by the City Council on August 7, to allow for the developer to begin non-TIF eligible improvements in order to meet deadlines for a new tenant.” The city documents for the August 7 meeting hold this: 2
The Developer has requested that the development agreement be approved now, prior to adoption of the project plan, to allow work to begin on the Meade Corridor improvements in order to complete the project in time for the tenant to move in. The Development agreement is drafted to allow for the Meade Corridor improvements to occur following adoption of the agreement, however, any work or reimbursement for TIF is contingent on City Council adoption of the project plan following the September 11 public hearing.
Citizens have to wonder will the September 11 public hearing have any meaning or relevance, given that on August 7 the city gave its de facto approval of the redevelopment plan.
Following, more information about tax increment financing.
Tax increment financing disrupts the usual flow of tax dollars, routing funds away from cash-strapped cities, counties, and schools back to the TIF-financed development. TIF creates distortions in the way cities develop, and researchers find that the use of TIF means lower economic growth.
How TIF works
A TIF district is a geographically-defined area.
In Kansas, TIF takes two or more steps. The first step is that cities or counties establish the boundaries of the TIF district. After the TIF district is defined, cities then must approve one or more project plans that authorize the spending of TIF funds in specific ways. (The project plan is also called a redevelopment plan.) In Kansas, overlapping counties and school districts have an opportunity to veto the formation of the TIF district, but this rarely happens. Once the district is formed, cities and counties have no ability to object to TIF project plans.
Before the formation of the TIF district, the property pays taxes to the city, county, school district, and state as can be seen in figure 1. Because property considered for TIF is purportedly blighted, the amount of tax paid is usually small. Whatever it is, that level is called the “base.”
After approval of one or more TIF project plans the city borrows money and gives it to the project or development. The city now has additional debt in the form of TIF bonds that require annual payments. Figure 2 illustrates. (There is now another form of TIF known as “pay-as-you-go” that works differently, but produces much the same economic effect.)
Figure 3 shows the flow of tax revenue after the formation of the TIF district and after the completion of a project. Because buildings were built or renovated, the property is worth more, and the property tax is now higher. The development now has two streams of property tax payments that are handled in different ways. The original tax — the “base” — is handled just like before, distributed to city, state, school district, and the state, according to their mill levy rates. The difference between the new tax and the base tax — the “increment” — is handled differently. It goes to only two destinations (mostly): The State of Kansas, and repayment of the TIF bonds.
Figure 4 highlights the difference in the flow of tax revenues. The top portion of the illustration shows development outside of TIF. We see the flows of tax payments to city, county, school district, and the state. In the bottom portion, which shows development under TIF, the tax flows to city, county, and school district are missing. No longer does a property contribute to the support of these three units of government, although the property undoubtedly requires the services of them. This is especially true for a property in Old Town, which consumes large amounts of policing.
(Cities, counties, and school districts still receive the base tax payments, but these are usually small, much smaller than the incremental taxes. In non-TIF development, these agencies still receive the base taxes too, plus whatever taxes result from improvement of the property — the “increment,” so to speak. Or simply, all taxes.)
The Kansas law governing TIF, or redevelopment districts as they are also called, starts at K.S.A. 12-1770.
TIF and public policy
Originally most states included a “but for” test that TIF districts must meet. That is, the proposed development could not happen but for the benefits of TIF. Many states have dropped this requirement. At any rate, developers can always present proposals that show financial necessity for subsidy, and gullible government officials will believe.
Similarly, TIF was originally promoted as a way to cure blight. But cities are so creative and expansive in their interpretation of blight that this requirement, if it still exists, has little meaning.
The rerouting of property taxes under TIF goes against the grain of the way taxes are usually rationalized. We use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from benefiting from police protection.
So when we pay property tax — or any tax, for that matter — people may be comforted knowing that it goes towards police and fire protection, street lights, schools, and the like. (Of course, some is wasted, and government is not the only way these services, especially education, could be provided.)
But TIF is contrary to this justification of taxes. TIF allows property taxes to be used for one person’s (or group of persons) exclusive benefit. This violates the principle of broad-based taxation to pay for an array of services for everyone. Remember: What was the purpose of the TIF bonds? To pay for things that benefited the development. Now, the development’s property taxes are being used to repay those bonds instead of funding government.
One more thing: Defenders of TIF will say that the developers will pay all their property taxes. This is true, but only on a superficial level. We now see that the lion’s share of the property taxes paid by TIF developers are routed back to them for their own benefit.
It’s only infrastructure
In their justification of TIF in general, or specific projects, proponents may say that TIF dollars are spent only on allowable purposes. Usually a prominent portion of TIF dollars are spent on infrastructure. This allows TIF proponents to say the money isn’t really being spent for the benefit of a specific project. It’s spent on infrastructure, they say, which they contend is something that benefits everyone, not one project specifically. Therefore, everyone ought to pay.
This attitude is represented by a comment left at Voice for Liberty, which contended: “The thing is that real estate developers do not invest in public streets, sidewalks and lamp posts, because there would be no incentive to do so. Why spend millions of dollars redoing or constructing public streets when you can not get a return on investment for that”
This perception is common: that when we see developers building something, the City of Wichita builds the supporting infrastructure at no cost to the developers. But it isn’t quite so. About a decade ago a project was being developed on the east side of Wichita, the Waterfront. This project was built on vacant land. Here’s what I found when I searched for City of Wichita resolutions concerning this project:
Note specifically one item: $1,672,000 for the construction of Waterfront Parkway. To anyone driving or walking in this area, they would think this is just another city street — although a very nicely designed and landscaped street. But the city did not pay for this street. Private developers paid for this infrastructure. Other resolutions resulted in the same developers paying for street lights, traffic signals, sewers, water pipes, and turning lanes on major city streets. All this is infrastructure that we’re told real estate developers will not pay for. But in order to build the Waterfront development, private developers did, with a total cost of these projects being $3,334,500. (It’s likely I did not find all the resolutions and costs pertaining to this project, and more development has happened since this research.)
In a TIF district, these things are called “infrastructure” and will be paid for by the development’s own property taxes — taxes that must be paid in any case. Outside of TIF districts, developers pay for these things themselves.
If not for TIF, nothing will happen here
Generally, TIF is justified using the “but-for” argument. That is, nothing will happen within a district unless the subsidy of TIF is used. Paul F. Byrne explains:
“The but-for provision refers to the statutory requirement that an incentive cannot be awarded unless the supported economic activity would not occur but for the incentive being offered. This provision has economic importance because if a firm would locate in a particular jurisdiction with or without receiving the economic incentive, then the economic impact of offering the incentive is non-existent. … The but-for provision represents the legislature’s attempt at preventing a local jurisdiction from awarding more than the minimum incentive necessary to induce a firm to locate within the jurisdiction. However, while a firm receiving the incentive is well aware of the minimum incentive necessary, the municipality is not.”
“This paper conducts a comprehensive assessment of the effectiveness of Chicago’s TIF program in creating economic opportunities and catalyzing real estate investments at the neighborhood scale. This paper uses a unique panel dataset at the block group level to analyze the impact of TIF designation and investments on employment change, business creation, and building permit activity. After controlling for potential selection bias in TIF assignment, this paper shows that TIF ultimately fails the ‘but-for’ test and shows no evidence of increasing tangible economic development benefits for local residents.” (emphasis added)
In the paper, the author clarifies:
“To clarify these findings, this analysis does not indicate that no building activity or job crea-tion occurred in TIFed block groups, or resulted from TIF projects. Rather, the level of these activities was no faster than similar areas of the city which did not receive TIF assistance. It is in this aspect of the research design that we are able to conclude that the development seen in and around Chicago’s TIF districts would have likely occurred without the TIF subsidy. In other words, on the whole, Chicago’s TIF program fails the ‘but-for’ test.
Later on, for emphasis:
“While the findings of this paper are clear and decisive, it is important to comment here on their exact extent and external validity, and to discuss the limitations of this analysis. First, the findings do not indicate that overall employment growth in the City of Chicago was negative or flat during this period. Nor does this research design enable us to claim that any given TIF-funded project did not end up creating jobs. Rather, we conclude that on-average, across the whole city, TIF was unsuccessful in jumpstarting economic development activity — relative to what would have likely occurred otherwise.” (emphasis in original)
The author notes that these conclusions are specific to Chicago’s use of TIF, but should “should serve as a cautionary tale.”
The paper reinforces the problem of using tax revenue for private purposes, rather than for public benefit: “Essentially, Chicago’s extensive use of TIF can be interpreted as the siphoning off of public revenue for largely private-sector purposes. Although, TIF proponents argue that the public receives enhanced economic opportunity in the bargain, the findings of this paper show that the bargain is in fact no bargain at all.”
TIF is social engineering
TIF represents social engineering. By using it, city government has decided that it knows best where development should be directed. In particular, the Wichita city council has decided that Old Town and downtown development is on a superior moral plane to other development. Therefore, we all have to pay higher taxes to support this development. What is the basis for saying Old Town developers don’t have to pay for their infrastructure, but developers in other parts of the city must pay?
TIF doesn’t work
Does TIF work? It depends on what the meaning of “work” is.
If by working, do we mean does TIF induce development? If so, then TIF usually works. When the city authorizes a TIF project plan, something usually gets built or renovated. But this definition of “works” must be tempered by a few considerations.
Does TIF pay for itself?
First, is the project self-sustaining? That is, is the incremental property tax revenue sufficient to repay the TIF bonds? This has not been the case with all TIF projects in Wichita. The city has had to bail out two TIFs, one with a no-interest and low-interest loan that cost city taxpayers an estimated $1.2 million.
The verge of corruption
Second, does the use of TIF promote a civil society, or does it lead to cronyism? Randal O’Toole has written:
“TIF puts city officials on the verge of corruption, favoring some developers and property owners over others. TIF creates what economists call a moral hazard for developers. If you are a developer and your competitors are getting subsidies, you may simply fold your hands and wait until someone offers you a subsidy before you make any investments in new development. In many cities, TIF is a major source of government corruption, as city leaders hand tax dollars over to developers who then make campaign contributions to re-elect those leaders.”
We see this in Wichita, where the regular recipients of TIF benefits are also regular contributors to the political campaigns of those who are in a position to give them benefits. The corruption is not illegal, but it is real and harmful, and calls out for reform. See In Wichita, the need for campaign finance reform.
The effect of TIF on everyone
Third, what about the effect of TIF on everyone, that is, the entire city or region? Economists have studied this matter, and have concluded that in most cases, the effect is negative.
“TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.”
So TIF districts are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:
“If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.
We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.” (emphasis added)
In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.” (emphasis added)
“This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.” (emphasis added)
These studies and others show that as a strategy for increasing the overall wellbeing of a city, TIF fails to deliver prosperity, and in fact, causes harm.
Wichita city council agenda packet for September 11, 2018. ↩
Wichita city council agenda packet for August 7, 2018. ↩
It may be very expensive for the City of Wichita to terminate its agreement with the Wichita Wingnuts baseball club, and there are questions.
As the City of Wichita prepares to build a new stadium for a new baseball team, there is the issue of the old stadium and the old team. The city has decided that the old stadium will be razed. On Tuesday the city council will consider what to do about the old team.
The old team, the Wichita Wingnuts, has a lease agreement with the city. The lease is from January 2015 and is for a period of ten years. The documents, both the lease from 2015 and the proposed settlement to be considered this week, appear in full in Wichita city council agenda packets. I’ve extracted the relevant pages for easier access. Click on lease or proposed settlement.
According to the settlement, the Wingnuts will receive either $2.2 million or $1.2 million, the smaller amount applying in the case the city is “unable to reach an agreement with an affiliated minor league baseball team in the year 2018.” The payment is scheduled to be made in installments over the next several years. (Section 2c)
Reading the lease, I can’t find anything regarding the need to pay for terminating the lease. So why the need to pay up to $2.2 million to terminate?
Here’s a possible answer: City documents hold this: “This negotiated settlement resolves all claims and potential claims that the parties have or may have, including breach of the Lease, loss of revenue, injunctive relief, specific performance, other contract breaches, tort assertions, and claims for equitable relief without the uncertainly of litigation.”
So there may be disputes that need to be resolved. Now the question becomes this: What did the city do? What could be so bad that the remedy is to pay the Wingnuts up to $2.2 million? Citizens ought to know the answer to this question.
Further, why is the amount of the settlement contingent on what happens in Wichita in the future? (Remember, the settlement is $2.2 million if the city lands a new team, but only $1.2 million if it doesn’t.) If the purpose of the settlement is to compensate the Wingnuts for harm caused by the city, how and why is the magnitude of harm dependent on future events?
Such a large settlement is especially surprising given the low rent the Wingnuts paid and the city’s history with the Wingnuts as a tenant. Consider:
The Wingnuts didn’t always pay their rent. The city charged the Wingnuts just $25,000 annual rent, and the team was $77,000 behind in rent in January 2015. The proposed settlement agreement states: “As of the Effective Date, the 2018 rent payment in the amount of Twenty-five Thousand Dollars ($25,000) due and payable by WIB to the City shall be waived and no longer due and payable by WIB.” (Section 2c) (WIB is the company that owns the Wingnuts.)
There have also been disputes over utility payments. But, the city will forgive the water and sewer bill: “The City shall pay all utility payments due to the Department of Public Works and Utilities that are assessed for 2018.” (Section 2d)
It’s clear that the Wingnuts haven’t always lived up to the basics of its agreement with the city. Why, then, does the city feel such a large obligation upon termination? Paragraph 13 of the lease says “Lessor agrees not to utilize termination for convenience for the purpose of placing any professional baseball franchise at the Lawrence-Dumont Stadium site.” This is what the city is doing. But, in paragraph 23: “The parties agree that upon a violation of any provision of this lease, the aggrieved party may, at its option, terminate this lease by giving the breaching party not less than 30 days written notice of termination.” Non-payment of rent seems like it ought to be a violation of the lease, giving the city the right to terminate the lease for cause.
What is the source of the $2.2 million? City documents state the source is “management agreement payments paid by the new AAA baseball team.” The meaning of “management agreement payments” is unclear and a question that needs an answer. But presumably this is money that the city would receive from the new team. If not paid to the Wingnuts, these funds might be available for other purposes.
And: If the city is not able to land a new team, the city will have to pay the Wingnuts $1.2 million without any compensating revenue source.
Repairs, replacements, and improvements
Here’s a puzzling aspect of the settlement: How was the dollar amount determined? City documents state: “The value of the severance is based on the number of years remaining in the existing lease and the anticipated City financial cost of capital repairs, replacements and improvements over those same remaining years.” (emphasis added)
What? “Repairs, replacements and improvements” to a stadium that will be demolished soon? Why is this a consideration?
Questions, but little time
There are questions, but little time for answers. The agenda packet was posted on the city’s website on Friday September 7, at 12:03 pm. The council will consider this item Tuesday morning.
Do council members have answers to these questions? Some of these matters may have been discussed in executive session. Now that the matters have been settled, it’s time to let citizens know the details.
But if council members don’t have answers, I don’t think they can make an informed vote.
I couldn’t stop noticing. I’d go on to see the same in Colorado Springs, in Fresno, in Indianapolis, in Oklahoma City, in Nashville.
And it wasn’t just the coffee shops — bars, restaurants, even the architecture of all the new housing going up in these cities looked and felt eerily familiar. Every time I walked into one of these places, my body would give an involuntary shudder. I would read over my notes for a city I’d visited months prior and find that several of my observations could apply easily to the one I was currently in.
In his commentary on this article, Aaron M. Renn wrote: “While every company tries its hardest to convince you of how much different and better it is than every other company in its industry, every city tries its hardest to convince you that it is exactly the same as every other city that’s conventionally considered cool.”
Later in the same piece, he wrote:
A challenge these places face is that the level of improvement locally has been so high, locals aren’t aware of how much the rest of the country has also improved. So they end up with an inflated sense of how much better they are doing versus the market. … People in these Midwest cities did not even know what was going on in the next city just 100 miles down the road. They were celebrating all these downtown condos being built. But the same condos were being built everywhere. … But even today people in most cities don’t really seem to get it that every city now has this stuff. Their city has dramatically improved relative to its own recent past, but it’s unclear how much it’s improved versus peers if at all.
Does this — the sameness of everywhere — apply to Wichita? Sure. Everyone thinks Wichita is different from everywhere else. We have a flag! A warehouse district! A Frank Lloyd Wright house! The NCAA basketball tournament! We’re (probably) getting a new baseball team and stadium!
We even have, as Schwindt does in cataloging what you’ll find in every single city mid-size and above, “Public murals that dare you to pass them without posing for a pic for the ‘gram.”
So many other places have this stuff, too.
It isn’t bad that Wichita has these things. But the danger, as Renn notes, is that these things don’t distinguish Wichita. As much as we wish otherwise, these things are probably not going to reverse the course of the declining Wichita economy. If you don’t believe the Wichita economy is declining, consider that our GDP in 2016 was smaller than in the year before. Wichita metro employment growth was nonexistent during 2017, meaning it’s unlikely that GDP grew by much. (In January 2017 total non-farm employment in the Wichita MSA was 295,000. In January 2018 it was the same. See chart here.)
Even things that might really have a positive effect on the economy, like the Wichita State University Innovation Campus, are far from unique to Wichita. But developments like this are pitched to Wichitans as things that will really put Wichita on the map. A prosperous future is assured, we are told.
It’s great to love your city. But we can’t afford to be lulled into complacency — a false recognition of achievement — when all the data says otherwise.