For 2017, the Kansas economy shrank, and just two states performed worse.
In 2017, the Kansas economy contracted by 0.1 percent in real (inflation-adjusted) dollars from 2016, according to preliminary statistics released today by Bureau of Economic Analysis, a division of the United States Department of Commerce.
This put Kansas in 48th position among the states, with only Connecticut and Louisiana posting lower numbers.
For the fourth quarter of 2017, Kansas GDP grew at an annual rate of 2.3 percent, slowing slightly from the third quarter rate of 3.8 percent. The rates of -6.1 percent and -0.3 percent in the first two quarters kept the state from showing overall growth in economic output for the year.
The nearby table shows change in GDP by industry, for Kansas, the nation, Plains states, and some comparison states.
The unemployment rate in the Wichita metropolitan area fell. So too did the number of jobs.
Today the Bureau of Labor Statistics released employment statistics for metropolitan areas through March 2018. These are numbers that are not seasonally adjusted, so it’s not very useful to compare any month with the month before. But it is appropriate to compare a month with the same month of the prior year.
The good news, sort of: The unemployment rate for the Wichita metro area declined to 3.9 percent in March 2018, down from 4.2 percent in March 2017. The number of unemployed persons also declined by 8.3 percent for the same period.
These numbers should be good news. But these two statistics don’t exist in a vacuum. Specifically, the unemployment rate is the ratio of the number of unemployed persons to the labor force. While the number of unemployed persons fell, so too did the labor force. It declined by 3,367 persons over the year, while the number of unemployed persons fell by 1,056. This produces a lower unemployment rate, but a shrinking labor force is not the sign of a healthy economy.
A further indication of the health of the Wichita MSA economy is the number of nonfarm jobs. This number declined by 1,200 from March 2017 to March 2018, a decline of 0.4 percent. This follows a decline of 0.7 percent from February 2017 to February 2018.
Of the metropolitan areas in the United States, BLS reports that 308 had over-the-year increases in nonfarm payroll employment, 72 had decreases, and 8 had no change.
Someone asked a question regarding an item on the Wichita City Council agenda today: How much will this cost taxpayers?
The item in question is agenda item IV-1: Public Hearing and Request for a Letter of Intent to Issue Industrial Revenue Bonds (WAM Investments #6, LLC). 1
Attached was an article from the Wichita Business Journal previewing the matter. 2
How much do these bonds cost taxpayers? It’s important to remember that with Industrial Revenue Bonds in Kansas, cities and counties are not the lender. 3 If this company was not able to pay the bond interest or principle, the city would be under no obligation to pay. The city makes no guarantee as to repayment. Bond buyers know this.
(As an aside, the Business Journal article states: “However, using IRB financing can help the company secure a lower interest rate.” This is simply not true unless the bonds are tax-exempt municipal bonds. Those bonds have a lower interest rate because the interest income is not subject to income tax. But the IRBs considered today are not tax-exempt.)
So if the city is not lending money, and if the city is not guaranteeing repayment, do these bonds have a cost to taxpayers? The answer depends on which side of the fence you sit.
The benefit to WAM, today’s applicant, is that IRBs carry with them tax abatements. Specifically, a whole or partial exemption from paying some property taxes. Additionally, IRBs also enable escape from paying sales tax on purchases made with bond proceeds.
So one way to look at the IRBs is that they do indeed have a cost. The city, county, school district, and state will not receive tax revenue they otherwise would receive.
Supporters of this incentive make two rebuttals. One is that without the tax abatements, the project would not be built. Therefore, no tax revenue. So by abating taxes for a period of time, the project can be built, and after the abatements expire, it will be paying taxes. (For this project, the property tax abatement is for five or likely ten years, with a reduced rate of abatement in the final five.)
The second argument is that by building something, new jobs and commerce are created. These new employees and commercial activity pay taxes. The city and other jurisdictions receive more from these new taxes than they gave up in tax abatements. This is called the benefit-cost ratio. It’s computed by Center for Economic Development and Business Research (CEDBR) at Wichita State University. City documents often refer to something like a “1.57:1 benefit-cost ratio,” meaning that for every one dollar foregone in tax revenue, the city expects to gain $1.57 in other tax revenue.
There are problems with these arguments. For the first: The developer of this project says the incentives are “critical.” If true, this claim exposes a large problem, which is if taxes are so high as to block investment, how are we going to grow as a city and region? Will every project require tax incentives? If not, why do some say they need incentives, and some don’t?
Second: Remember that government says that with the new project, tax revenue will increase. But this almost always happens regardless of whether the company has received incentives. Therefore, the benefit-cost ratio calculations are valid only if incentives were absolutely necessary.
Are incentives necessary? The benefiting companies usually make their case with a lot of numbers and projections, most of which are simply guesses. Plus, there is strong incentive to not tell — to not know — the truth. Here’s why. Suppose fictional company XYZ dangles the idea of expanding its presence in Wichita, or maybe in some other city. XYZ cites incentive packages offered by other cities. Wichita comes up with millions in incentives, and XYZ decides to expand in Wichita. Question: Were the incentives necessary? Was the threat to expand elsewhere genuine? If XYZ admits the threat was not real, then it has falsely held Wichita hostage for incentives. If the city or state admits the threat was not real, then citizens wonder why government gave away so much. No one has an incentive to be truthful. 4
Back to the item on today’s agenda. How much tax revenue is foregone through the abatements? City documents in the agenda packet did not have these numbers, but a presentation made to council members did, as follows:
Value of one year 95% tax abatement ($6,000,000 at 80%)
City of Wichita: $37,240
Sedgwick County: $33,508
USD 375 (Circle public schools): $61,255
State of Kansas: $1,710
These values would apply annually for five years. If occupancy goals are met, the incentives would apply for another five years, at a lower rate. (The values above are 95 percent of the usual taxes. The rate for the second five years would be 50 percent of the usual taxes.)
(As an aside, the Business Journal should not use headlines like it did in this case: “Wichita City Council to consider $6 million in IRBs for industrial spec building.” A better headline would be something like “Wichita City Council to consider $133,713 in annual tax abatements.” That is the real economic transaction that happened today.)
But this is not all. The applicant company will almost certainly receive an exemption from paying sales tax on the building. City documents did not provide an estimate for how much sales tax might be abated, but it could be several hundred thousand dollars.
Wichita City Council agenda packet for May 1, 2108. ↩
For more on this, see LeRoy, Greg. The Great American Jobs Scam. Especially chapter two, titled Site Location 101: How Companies Decide Where to Expand or Relocate. The entire book may be read online at http://www.greatamericanjobsscam.com/pages/preview-book.html. A relevant excerpt: “These prisoners’ dilemma games also enable companies to create fictions about cause and effect. These fictions can be used to create public versions of how deals happened that no one can credibly contradict, because the company’s real decision-making process will never be revealed. The most important fiction to maintain, of course, is that subsidies matter in deciding where a company expands or relocates. For example, being able to send secret signals to competing cities means companies can tell contradictory stories to different cities and have no fear of being exposed. If a company really has its heart set on City A, it can tell that city that it is in the hunt, but needs to do better. Meanwhile, it can send less urgent signals to Cities B and C, even if they offered bigger packages at first. Eventually, City A offers the biggest package, and the company announces its decision to go there.” ↩
The Wichita City Council will consider a budget for the city’s tourism fee paid by hotel guests.
If you stay at a hotel in Wichita, you’ll pay sales tax of 7.5 percent, hotel tax (transient guest tax) of 6.00 percent, and since 2015, a tourism fee of 2.75 percent. The tourism fee arises from the city’s creating of a Tourism Business Improvement District (TBID), with boundaries matching those of the city. 1 Funds collected from this fee go to Visit Wichita, the city’s visitor and convention bureau. (Of note, the TBID ordinance specifies that if the tax is itemized on hotel bills, it is to be called the “Tourism Fee.” Everyone pays, even those who are not tourists.) (Also, some hotels are in Community Improvement Districts, charging up to another 2 percent.)
This week the Wichita City Council will consider the budget for the use of this tourism fee revenue. 2 City documents (the agenda packet) show actual results and goals for economic impact. As can be seen in the nearby excerpt, for leisure travel in 2017, Visit Wichita claims $81,343,227 in economic impact. This figure comes from summing identifiable dollars, which comes to $20,433,737. Then a multiplier is applied to produce the economic impact. All this results in a return of investment of $53 dollars for every dollar of investment (“Media Leisure Investment”), Visit Wichita says. (This is for the “leisure” market segment only. There are separate goals and statistics for group travel, which is meetings, conventions, or sporting events.)
This data represents what is called “incremental” travel, for which Visit Wichita takes credit: “The rate of travel by those who are ‘unaware’ is considered the base rate of travel, which would have been achieved if no advertising were placed. Any travel above this base by ‘aware’ households is considered influenced — or the rate of incremental travel.” 3
As for the performance of the overall Wichita hotel market, growth is slow. Looking at growth in hotel tax collections, only two of the ten largest markets in Kansas have grown slower than Wichita. This is since January 1, 2015, which was when the tourism fee started. (Hotel tax collections collected by the Kansas Department of Revenue do not include local taxes like the city tourism fee.)
An interactive visualization of tax collections by state governments.
Each year the United States Census Bureau collects a summary of taxes collected by each state for 5 broad tax categories and up to 25 tax subcategories. 1 I’ve collected this data and made it available in an interactive visualization.
You may recall that Kansas raised personal income tax rates in 2017 and made the new rate retroactive to January 1, 2017. But that change doesn’t seem to have affected this data. For 2016, Kansas collected $768 per person in individual income taxes, and for 2017, $799. Here’s why:
For most states, including Kansas, this data is for the fiscal year, not the calendar year. 2 New withholding tax tables were not available until June 27, 2017, just three days before the end of fiscal year 2017. 3
Liquor enforcement tax collections provide insight into the economic impact of hosting NCAA basketball tournament games in Wichita.
In Kansas, a tax is collected at liquor stores, grocery stores, and convenience stores on the sale of alcoholic beverages. The same tax is also collected on sales to clubs, drinking establishments, and caterers by distributors. 1 This tax is called the liquor enforcement tax. The rate has been 8 percent since 1983, when it was raised from 4 percent. 2
This tax provides some insight into the level of sales of alcoholic beverages at bars, clubs, and restaurants. It is not a perfect measurement of that, and perhaps not even a very good measurement, as it also includes sales at retail outlets for consumption offsite.
Nonetheless, it’s data we have. The Kansas Department of Revenue provides this data on a monthly basis for each county. With the touted influx of visitors for the NCAA men’s basketball tournament games in Wichita in May — along with the generalized party atmosphere — we might to expect to see these tax collections rise during March. Here’s what happened.
The liquor tax collections exhibit pronounced seasonality, so it’s useful to compare the same month of the previous year, as follows for Sedgwick County:
March 2017: $1,315,653
March 2018: $1,085,214
Change: -$230,439, a decline of 17.5 percent.
Not only was March 2018 lower than March 2017, it was lower than five of the previous six months of March.
The monthly average for the 12 months prior to March 2018 was $1,243,793. March 2018 didn’t meet that standard.
Kansas liquor enforcement tax collections are available in an interactive visualization here.
“Liquor Enforcement or Sales Tax. The second level of taxation is the enforcement or sales tax, which is imposed on the gross receipts from the sale of liquor or CMB to consumers by retail liquor dealers and grocery and convenience stores; and to clubs, drinking establishments, and caterers by distributors.”
Also: “Enforcement. Enforcement tax is an in-lieu-of sales tax imposed at the rate of 8 percent on the gross receipts of the sale of liquor to consumers and on the gross receipts from the sale of liquor and CMB to clubs, drinking establishments, and caterers by distributors.
A consumer purchasing a $10 bottle of wine at a liquor store is going to pay 80 cents in enforcement tax.
The club owner buying the case of light wine (who already had paid the 30 cents per gallon gallonage tax as part of his acquisition cost) also now would pay the 8 percent enforcement tax.”
Kansas Legislative Research Department. Kansas Legislator Briefing Book 2017. Available at http://www.kslegresearch.org/KLRD-web/Publications/BriefingBook/2017Briefs/J-4-LiquorTaxes.pdf. ↩
Here’s evidence of a government program that, undoubtedly, was started with good intentions, but hasn’t produced the intended results.
Tax season ended last week. Taxpayers have filed for over $30 billion in credits and deductions for college expenses they paid in 2017.
Evidence now clearly shows that these credits have zero effect on college attendance. The tax credits surely make those who get them better off, but they do nothing to increase education. If their intent is to increase schooling, they are a failure.
In this episode of WichitaLiberty.TV: Dr. Russ McCullough of Ottawa University introduces us to the Gwartney Institute and explains the importance of economic freedom. View below, or click here to view at YouTube. Episode 194, broadcast April 28, 2018.
Dr. Russ McCullough is the Wayne Angell Chair of Economics at Ottawa University in Kansas. He is also the Founder/Director of the Gwartney Institute for Freedom, Justice and Human Flourishing — A think tank that explores the evidence of social institutions around the world including faith and economics. He joined OU in 2011 coming from Iowa State University where he earned his PhD in Public Economics and taught classes while pursuing many entrepreneurial endeavors.
He completed his BA degree at St. Cloud State University in Minnesota where he grew up. While working on his dissertation in 1997, he was offered co-ownership in a real estate firm he worked at through school that specialized in college student housing. Property management and real estate sales eventually grew into having a few agents under his brokerage license. Shortly thereafter his daily activities focused more on real estate development which included multi-family housing, commercial mixed-use buildings and subdivisions. Real estate served as a catalyst into other business ventures including a construction company, a restaurant, a boutique hotel and an equestrian center.
Russ has studied and taught the economic principles of Fredrick Bastiat to his students in a course he developed called Entrepreneurial Economics. In addition to Bastiat, this class includes readings from Frederick Hayek, Ludwig Von Mises, Israel Kirzner and Ayn Rand.
Hotel tax collections provide an indication of the economic impact of hosting a major basketball tournament.
The Kansas Department of Revenue has released transient guest tax collections for March 2018. This is a tax added to hotel bills in addition to sales tax. The rate in Kansas is 6.00 percent, although some localities add additional tax to that.
For the city of Wichita, here are the collections:
March 2017: $538,539
March 2018: $543,844
Increase: $5,305 or 0.99 percent
With the hotel tax at 6.00 percent, that increase implies additional sales of $88,417 for the same month of the prior year. (The 2.75% tourism fee that is also added to Wichita hotel bills is paid directly to the city, so it does not appear in the statistics from the Kansas Department of Revenue.)
While an increase from the same month of the previous year is good, the average monthly hotel tax collections for the year before (March 2017 through February 2018) was $590,770.
So March 2018 didn’t exceed the average month of the previous year. It also didn’t exceed March 2016. Whatever was happening in Wichita during that month, the city generated $665,854 in hotel taxes.
Kansas transient guest tax collections are available in an interactive visualization here.
County Business Patterns (CBP) is an annual series that provides subnational economic data by industry. This series includes the number of establishments, employment during the week of March 12, first quarter payroll, and annual payroll. This data is useful for studying the economic activity of small areas; analyzing economic changes over time; and as a benchmark for other statistical series, surveys, and databases between economic censuses. Businesses use the data for analyzing market potential, measuring the effectiveness of sales and advertising programs, setting sales quotas, and developing budgets. Government agencies use the data for administration and planning. 1
What does this data tell us about counties in Kansas? I gathered the data back to 2005 and made the data in an interactive visualization available here. In the nearby illustration I show the data for large Kansas counties, starting in 2010. (In the visualization you may adjust all these parameters.) The data is indexed so that we can see relative changes independent of the size of the county.
In the chart, we can see that some Kansas counties are doing better than others. Notably, Sedgwick County shows a decline in employees and payroll in 2016.
If Wichita-area companies can’t fill jobs, the declining labor force may be the reason. Who is responsible?
The Chung Report has a recent article noting the low unemployment rate in Wichita. That may make it difficult to fill jobs: “Wichita also has a low unemployment rate, which has seen steep decline in the past five years and now sets at 3.9 percent, below the national average of 4.1 percent. So even if companies are dead set on hiring, do we have the available workforce?” 1
It’s a useful article. But where it could be better, especially when discussing how Wichita companies will find workers to fill anticipated new jobs, is to note the shrinking Wichita labor force.
Here is a table of data for the Wichita MSA from the Bureau of Labor Statistics Local Area Unemployment Statistics (LAUS) program. 2 It is part of the Bureau’s Current Population Survey (CPS), which is a “monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics.” 3
I chose the year ending January 2011 as a comparison point, as it is near the low point of the great recession. Since then, the unemployment rate has fallen greatly, and is just half the rate of 2010.
But that isn’t the total story. It isn’t even the most important part of the story. Since the unemployment rate is a ratio, it has two moving parts, specifically the number of unemployed people and the number of people in the labor force. (The labor force, broadly, is the number of persons working plus those actively looking for work.)
It is possible that the unemployment rate falls while the number of people employed falls or rises slowly. This is the general trend in Wichita for the past seven years or so. The nearby table illustrates this. The labor force has fallen, and by a lot, while employment growth has been modest.
In fact, of the changes, we can say that 35.2 percent of the change in the unemployment rate is due to new jobs, while 67.8 percent of the change is due to a smaller labor force.
So when Wichita leaders ask “Do we have the workforce?” the answer might be no. The next question ought to be “Why not?”
Our leaders are quick and eager to take credit for economic development gains. But what about the shrinking labor force caused by the many of the same leaders and their policies?
As the proverb says, “Success has many fathers, while failure is an orphan.”
A full-page advertisement defending the leadership of Wichita State University, from “Friends of the University,” appearing in the Wichita Eagle, Sunday April 22, 2018. For the advertisement as it appeared in the newspaper, click here. For the advertisement from the week before, which criticized the university leadership, click on Wichita State University degraded, says ad.
INNOVATIVE THINKING FOR TODAY’S REALITIES IN HIGHER EDUCATION
The playing field of higher education is rapidly changing. The models of the 1970s, or even 1990s, are no longer applicable. With state public funding now paying only about 35% of total educational costs, roughly half of the amount covered less than 20 years ago, universities must seek new avenues of revenue and partnerships, enabling delivery of high quality education across their campuses.
Wichita State University, under President John Bardo, is on the leading edge of this forward-thinking concept. The WSU innovation campus, creation of WSU Tech, and a number of other initiatives recently launched will provide the pathway to ongoing success, not merely for the University but all of Wichita and South Central Kansas, for decades to come.
For the record, we support Doctor Bardo and his colleagues who are bringing highly favorable national recognition to our community, while assuring Wichita State’s ability to continue to prepare students with knowledge and skills for successful careers in all academic areas.
Loyal Shockers in Support of our University and its Leadership
Al Higdon, treasurer, 1513 Foliage Court, Wichita, Ks. 316-650-8665
We the undersigned endorse and have paid for this message, in the best interest of Wichita State University, its students, faculty and staff, as well as for the prosperity of our greater community.
There followed a list of signatories. Also:
Paid political advertisement
When properly considered, Kansas often underperforms the nation in the most recent assessment of “The Nation’s Report Card.”
The results for the 2017 administration of the National Assessment of Educational Progress, or NAEP, were recently released. I’ve prepared interactive visualizations of some of the results. To access the visualizations, click on National Assessment of Educational Progress (NAEP).
When considering NAEP results, it’s important to consider subgroups, such as race/ethnicity and school lunch status, which is a proxy for poverty. It’s important because states vary widely in the composition of subgroups.
For example, consider an accompanying example from the visualization. We see that when considering all students, Kansas does better than the national average in percent of students performing as basic or better. This is true in all four combinations of grade and subject.
Looking at black students alone, however, we see that Kansas underperforms the nation, except in one instance where there is a tie.
For Hispanic students alone, Kansas does better in all instances except for one tie.
For white students alone, Kansas underperforms the nation in three instances, and outperforms in one.
This statistical anomaly is known as Simpson’s Paradox. It may appear when comparing subgroups to aggregated data when the proportional composition of subgroups varies between populations, in this case the states. For grade 4 reading, 64 percent of students in Kansas were white. For the nation, it was 49 percent. This is a difference in composition that must not be ignored.
The relatively low proportion of minority students is why Kansas appears to perform better than the nation. The apparent superior performance of Kansas melts away when looking at subgroups.
In this episode of WichitaLiberty.TV: United States Senator Dr. Tom Coburn wrote the foreword to the book “What Was Really the Matter with the Kansas Tax Plan –- The Undoing of a Good Idea.” He’s here to tell us what went wrong, and what we need to do. View below, or click here to view at YouTube. Episode 193, broadcast April 21, 2018.
A full-page advertisement critical of the leadership of Wichita State University, from “Friends of the University,” appearing in the Wichita Eagle, Sunday April 15, 2018. For the advertisement as it appeared in the newspaper, click here.
WHOSE UNIVERSITY IS IT ANYWAY?
As Kansans and taxpayers, we protest the degradation of our public democratic institution, Wichita State University. The current university leaders have eroded the bedrock policies and values upon which the university was founded.
With their intimidations and threats to underfund The Sunflower, the student newspaper, they have assaulted freedom of the press
With the creation of the WSU Innovation Alliance, they have sublet public university land to private developers, thereby evading the requirements of the Kansas Open Records and Open Meetings Acts
With their refusal to fund faculty positions in certain disciplines, they have undermined the liberal arts and sciences, an insult to the university’s original purpose
With their use of student fees to support the Innovation Campus, they have saddled present and future students with millions in future debt obligations
With their decisions to build a multi-million-dollar housing complex, and to divert 5 percent of scholarship money to non-academic purposes, they have evaded accountability to the university’s owners, the people of Kansas
With their use of non-credit and non-academic courses to inflate student enrollment numbers, they have undermined public confidence in their integrity — and their stewardship
With their allocation of a public building to a private school, they have flouted the principle that public resources be used to the public’s benefit
As Kansans, we beseech the Kansas Board of Regents to redress these abuses of the public trust, and to protect students, faculty members and community residents from further such abuses.
There followed a list of signatories, plus an indication there are some who wanted anonymity. Also:
This ad was paid for by Friends of the University.
Anne Woods — Treasurer | P.O. Box 8714 | Wichita, KS 67208 | 316-688-1889
Paid political advertisement
In this episode of WichitaLiberty.TV: Kansas Senator Ty Masterson, a Republican from Andover, joins Bob and Karl to update us on happenings in the Kansas Legislature. View below, or click here to view at YouTube. Episode 192, broadcast April 14, 2018.
As in years past, a truthful accounting of the finances of Intrust Bank Arena in downtown Wichita shows a large loss.
The true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters cite a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and it hides the true economics of the arena. What’s missing is depreciation expense.
There are at least two ways of looking at the finance of the arena. Nearly all attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and SMG, a company that operates the arena. 1
This agreement specifies a revenue sharing mechanism between the county and SMG. For 2107, the accounting method used in this agreement produced a profit, or “net building income,” of $1,000,829 to be split (not equally) between SMG and the county. The county’s share was $300,414. 2
While described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations in conformity with accounting principles generally accepted in the United States of America.” 3
That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.
A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2017 Comprehensive Annual Financial Report for Sedgwick County. 4 This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially last year. In that respect, it is a report card of our ability to manage our financial resources.”
Regarding the arena, the CAFR states:
The Arena Fund represents the activity of the INTRUST Bank Arena. The facility is operated by a private company; the County incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any, and naming rights fees. The Arena Fund had an operating loss of $4.3 million. The loss can be attributed to $4.5 million in depreciation expense.
Financial statements in the same document show that $4,522,596 was charged for depreciation in 2017.
If we subtract SMG payment of $300,414 from depreciation expense, we learn that the Intrust Bank Arena lost $4,222,182 in 2016.
Depreciation expense is not something that is paid out in cash. That is, Sedgwick County did not write a check for $4,522,596 to pay depreciation expense. Instead, depreciation accounting provides a way to recognize and account for the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.
But not many of our civic leaders recognize this, at least publicly. We — frequently — observe our governmental and civic leaders telling us that we must “run government like a business.” The county’s financial report makes mention of this: “Sedgwick County has one business-type activity, the Arena fund. Net position for fiscal year 2017 decreased by $4.3 million to $156.3 million. Of that $156.3 million, $146.0 million is invested in capital assets. The decrease can be attributed to depreciation, which was $4.5 million.” 5 (emphasis added)
At the same time, these leaders avoid frank and realistic discussion of economic facts. As an example, in years past Commissioner Dave Unruh made remarks that illustrate the severe misunderstanding under which he and almost everyone labor regarding the nature of 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 — witting or not — is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) in the arena is merely a historical artifact, something that happened in the past, something that has no bearing today. There is no opportunity cost, according to this view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds. Since Kansas is one of the few states that adds sales tax to food, low-income households paid extra sales tax on their groceries to pay for the arena — an arena where they may not be able to afford tickets.
Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct that depreciation expense is not a cash expense that affects cash flow, it is an economic reality that can’t be ignored — except by politicians, apparently. The Wichita Eagle and Wichita Business Journal aid in promoting this deception.
The upshot: We’re evaluating government and making decisions based on incomplete and false information, just to gratify the egos of self-serving politicians and bureaucrats.
Reporting on Intrust Bank Arena financial data
In February 2015 the Wichita Eaglereported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time. Neither did the Eagle article.
In December 2014, in a look at the first five years of the arena, its manager told the Wichita Eagle this: “‘We know from a financial standpoint, the building has been successful. Every year, it’s always been in the black, and there are a lot of buildings that don’t have that, so it’s a great achievement,’ said A.J. Boleski, the arena’s general manager.”
The Wichita Eagle opinion page hasn’t been helpful, with Rhonda Holman opining with thoughts like this: “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.” (For some years, the county paid to create a large “check” for publicity purposes.)
That followed her op-ed from a year before, when she wrote: “And, of course, Intrust Bank Arena has the uncommon advantage among public facilities of having already been paid for, via a 30-month, 1 percent sales tax approved by voters in 2004 that actually went away as scheduled.” That thinking, of course, ignores the economic reality of depreciation.
All of these examples are deficient in an important way: They contribute confusion to the search for truthful accounting of the arena’s finances. Recognizing depreciation expense is vital to understanding profit or loss, we’re not doing that.
Management Agreement between Sedgwick County and SMG. August 1, 2007. Available here. ↩
Minutes of the Sedgwick County Commission, February 14, 2018. ↩
Management Agreement between Sedgwick County and SMG. ↩
As Project Wichita gets ready to gather information and set goals, let’s be aware that we’ve done this before, and not long ago.
Project Wichita is a new initiative to do something about the future of Wichita. I hope it works. But we’ve been down this road before, and I don’t know of anything created that has been of lasting value.
That past effort was Visioneering Wichita. I’d supply a link to its website, but the site went stale from lack of updates. Eventually it was abandoned, although its remnants may be found at archive.org. (Visioneering Wichita does have a Facebook page, although it hasn’t been updated for eight years.)
Here’s one of the goals that Visioneering Wichita created for the city:
Income Growth: The Wichita MSA must increase its focus on those non-manufacturing job sectors that generate higher pay. Since 2002, the Wichita per capita income as a percent of the United States per capita income has slowly increased, and in 2006 and 2007, the value exceeded 100%, for the first time since 1987.16 In spite of the recent uptick in Wichita’s per capita income as a percentage of the United States, it is expected that it will continue the longer term decline c until: a) the decline in manufacturing jobs stops b) the gap between the United States and Wichita in non-manufacturing earnings per job begins to decrease and c) the gap in minority income is decreased. 1
I’ve gathered data on per capita personal income through 2016, the latest year for a full year of data, and prepared charts similar to those Visioneering used. Wichita per capita personal income continues to be lower than the cities identified as Visioneering peers, except for Oklahoma City. In fact, Wichita per capita personal income was lower in 2016 than in 2014.
Comparing Wichita to the nation, we see that Wichita took a downturn the past few years.
Per capita measures, while useful, are not without caveats that need to be understood and considered. For example, if half the people of Wichita moved to other cities, the per capita income would not change if the income of those who left was evenly distributed compared to the original distribution.
Staff of the Visioneering Wichita project used to provide updates on these statistics from time to time. The last update provided to officials that I can recall was in 2013.
Speaking of moving from Wichita, one of the things our region needs to address is the shrinking labor force. Data from the Bureau of Labor Statistics shows that the Wichita labor force is on the decline, while it is rising for the nation.
Of the declining labor force, Wichita government and civic leaders use this in two different, and conflicting, ways. First, the declining labor force means that even though job growth is very low, the unemployment rate has dropped, and by a lot. This improved unemployment rate is trumpeted by politicians and bureaucrats. Second, we see concern that Wichita may not have the workers necessary to fill jobs in expanding companies like Spirit Aerosystems. This is used to promote increasing spending on incentives and training infrastructure.
Perhaps the best thing Project Wichita could do is to reveal the truth about the Wichita economy and the economic development infrastructure we’ve built. The Chung Report has done a bit of this. But I don’t think our civic leaders act as through they know and understand. It is against their self-interest to admit that what they’ve done hasn’t been working.
Visioneering Wichita Revised Vision Document, May 2009. ↩