Voice For Liberty

Tag: Center for Economic Development and Business Research

  • Spirit Aerosystems incentives reported

    Spirit Aerosystems incentives reported

    Opinions vary on economic development incentives, but we ought to expect to be told the truth of the details.

    The Wichita Business Journal has reported on the economic development incentives used to cement the Spirit AeroSystems expansion announced last week. Following are some quotes from its article How Wichita won the battle for Spirit AeroSystems’ expansion. Background on the aspects of the deal can be found at Spirit expands in Wichita.

    Wichita Business Journal: “And many aren’t shy about bringing cash to the table as an incentive. In Wichita, in the wake of the defeat at the polls in 2014 of a sales tax measure that would have been used in part for economic development activities, such a war chest isn’t an option.”

    Wichita and Sedgwick County are contributing cash and cash-equivalents to the deal. See below for more.

    Further, the city has other ways to fund a “war chest” of incentives. While the sales tax failed to pass, there was nothing to prevent the city council from raising other taxes (such as property tax or franchise fees) to raise funds for economic development. Now there is a property tax limitation imposed by the state, but there are many loopholes the council could drive a large truck through, including holding an election asking voters to raise property taxes.

    Also, the city justifies spending on economic development incentives by the positive return to the city. That is, for every dollar the city spends or forgoes in future taxes, it receives a larger amount in return. For this project, the analysis provided by Center for Economic Development and Business Research at Wichita State University reports a benefit/cost ratio of 2.75 to one for the city. That is, the city believes it will receive $2.75 for every $1.00 “invested.” If the city truly believes this, it should have no hesitation to issue bonds to fund this incentive, repaying the bonds with the projected benefits.

    Wichita Business Journal: “‘Here … the state, city and county put together a very creative package focused on infrastructure and training,’ [Spirit CEO Tom] Gentile said.”

    I suppose the innovative aspects of the package are the formation of a new business entity to build and own a large building, funded largely by the city and county. Also, the infrastructure referred to may mean the city’s forgiveness of Spirit’s debt to the city regarding a special water project.

    Wichita Business Journal: “The government investment isn’t cash, but it is a way of helping Spirit grow that Gentile said combined with local training opportunities to make the government involvement important to Spirit’s decision to expand in Wichita.”

    According to the agreement the city and county will consider this week, both Sedgwick County and the City of Wichita are contributing cash. The city will also forgive a large debt owed by Spirit. It’s hard to see how canceling a debt is different from giving cash.

    Also, city, county, state, and school district are canceling millions in property and sales taxes that Spirit would otherwise owe, which is also difficult to distinguish from a cash benefit.

    Finally, the state, under the PEAK problem, will likely refund to Spirit the state income tax withheld from their paychecks (minus a small fee).

    Wichita Business Journal: “‘Because Spirit was willing to look at another way of investing, because this community said it was more important to invest in other ways, they’re allowing us to invest in infrastructure instead of handing Spirit cash,’ Wichita Mayor Jeff Longwell said Wednesday. ‘We believe that our community can rally behind that. We’re investing in Spirit and they’re investing in our community.’”

    I’d really like to know the “another way of investing” the mayor mentions. Plus, contrary to the mayor’s assertion, the city is handing Spirit cash. Well, it’s giving cash to a new business entity whose sole purpose is to provide a new building for Spirit. Perhaps for Jeff Longwell that’s a distinction with a meaningful difference. If so, that’s too bad.

    There are differing opinions as to the necessity and wisdom of economic development incentives. But we ought to expect the unvarnished truth from our mayor and economic development officials. It would be great if the Wichita Business Journal helped report the truth.

  • Spirit expands in Wichita

    Spirit expands in Wichita

    It’s good news that Spirit AeroSystems is expanding in Wichita. Let’s look at the cost.

    While it is good news that Spirit AeroSystems is expanding its Wichita operations, it is not without cost to several governmental agencies. Here’s a summary of what is publicly available so far.

    First, a new “entity” will be formed in order to facilitate the construction and ownership of a new building on the Spirit campus. 1

    This entity will be funded with $7 million in cash from Sedgwick County and $3 million cash from the City of Wichita. Further, the city will forgive Spirit’s debt of $3.5 million associated with a water project. 2

    Second, through the mechanism of Industrial Revenue Bonds,3 Spirit receives a property tax exemption of one hundred percent for five years, with renewal for another five years if goals are met. Despite the use of the term “bond,” no governmental entity is lending money to Spirit, and no one except Spirit is liable for bond repayment.

    Third: The bonds confer another benefit to Spirit: According to city documents, “IRBs will, pursuant to STATE law, provide for a sales tax exemption on materials and labor subject to sales tax necessary to construct and equip FACILITY.” 4 City documents give no dollar amount is given for the sales tax exemption. But in the analysis conducted by Center for Economic Development and Business Research at Wichita State University these figures are used for the amount of sales tax exemption: City of Wichita: $279,445. Sedgwick County: $137,354. State of Kansas: $3,120,000. Total: $3,536,799. 5

    Fourth, this project will undoubtedly qualify for PEAK, or Promoting Employment Across Kansas. This is a State of Kansas program that allows companies to keep the state income taxes their employees pay through paycheck withholding, less a small fee. 6 It isn’t possible to know in advance how much PEAK benefit the company will receive, because the individual circumstances of each employee determine the income tax withheld. The following calculation, however, gives an indication of the magnitude of the amount of PEAK benefits Spirit can expect:

    $56,000 annual salary / 26 pay periods = $2,154 per bi-weekly pay period. For a married worker with two children, withholding tables show $55 to be withheld each pay period, or $55 * 26 = $1,430 per year. For 1,000 employees, the PEAK benefit is $1,430,000 per year. 7

    There may be other programs that this project qualifies for.

    Are these incentives necessary?

    Taxpayers might be wondering if these incentives are necessary for Spirit to be able to expand its operations, and for it to select Wichita as the site. Spirit says it has received generous offers from other locations. If so, Spirit could do itself a favor by revealing these offers. So too, could other Wichita companies that have claimed intense courtship by other cities. But the economic development industry operates in darkness.

    One thing that would also increase the credibility of economic development efforts is for Wichita Mayor Jeff Longwell (and others) to stop making claims of “no more cash incentives.” The city explicitly offers cash in this proposal. The city also offers to cancel a debt, which is just like cash. Forgiveness of future taxes is as good as cash, too.

    For years we’ve been told that Wichita needs to diversify its economy, meaning that it relies too heavily on the aircraft industry. This expansion by Spirit will undoubtedly heighten that concentration. We should not turn down this expansion of our local economy. But the incentives that are offered have a cost, and that cost is paid — partly — by other business firms in other industries that are trying to grow in Wichita.

    Many will undoubtedly cheer the Spirit announcement as an economic development win on a large scale. It will add many jobs. But the Wichita-area economy is so far behind it will take much more growth than this to catch up with the rest of the nation. In fact, the Wichita-area economy shrank last year. 8 And while many cheer our low unemployment rate, sole reliance on that number hides a shrinking labor force. 9

    Also, let’s be appropriately humble when boasting about this expansion. A region’s largest employer deciding to expand in the same city: This is the minimum level of competence we ought to expect from our economic development machinery.

    Further, economists caution us to look beyond any single project, no matter how large, and consider the entirety of the local economy. As economist Art Hall has noted, large-employer businesses have no measurable net economic effect on local economies when properly measured. “The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.” 10

    That’s assuming that the incentives even work as advertised in the first place. Alan Peters and Peter Fisher, in their paper titled The Failures of Economic Development Incentives published in Journal of the American Planning Association, wrote on the effects of incentives. A few quotes from the study, with emphasis added:

    Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.

    On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.

    The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering their expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.

    —
    Notes

    1. “The CITY, COUNTY and COMPANY would each take action to establish a new legal entity separate and apart from the CITY, COUNTY and COMPANY for development of the PROJECT (the “ENTITY”) which will take such form as the PARTIES may approve.” Memorandum of Understanding for Project Eclipse, Section I.A. Contained within agenda packet for Wichita City Council meeting for December 13, 2017. ↩
    2. “The COUNTY participation of $7 million US is anticipated to be available cash; the CITY participation would consist of cash in the amount of $3 million US, forgiveness of $3.5 million US in future COMPANY payments associated with the CAPITAL COMPONENT and an agreement to make additional capital improvements relating to the WATER AGREEMENT in an approximate cost of $1 million US.” Memorandum of Understanding for Project Eclipse, Section I.B ↩
    3. Weeks, Bob. Industrial revenue bonds in Kansas. Available at https://wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/. ↩
    4. Memorandum of Understanding for Project Eclipse, Section I.3.E ↩
    5. Project Eclipse – ROI calcs plus author’s calculation. Available at https://drive.google.com/file/d/1uGaxTgrctYpBjkG7PR6bP81SxgFjpzjo/. ↩
    6. Weeks, Bob. PEAK, or Promoting Employment Across Kansas. Available at https://wichitaliberty.org/kansas-government/peak-promoting-employment-across-kansas/. ↩
    7. Kansas Department of Revenue Withholding tables. Available at https://www.ksrevenue.org/pdf/whtables2017.pdf. ↩
    8. Weeks, Bob. Wichita economy shrinks. Available at https://wichitaliberty.org/economics/wichita-economy-shrinks/. ↩
    9. “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.” Weeks, Bob. Wichita employment up. Available at https://wichitaliberty.org/wichita-government/wichita-employment-up/. ↩
    10. William F. Fox and Matthew N. Murray, “Do Economic Effects Justify the Use of Fiscal Incentives?” Southern Economic Journal, Vol. 71, No. 1, 2004, p. 79. A ↩
  • Downtown Wichita report omits formerly prominent data

    Downtown Wichita report omits formerly prominent data

    The new State of Downtown Wichita report for 2017 is missing something. What is it, and why is it missing?

    Recently the Wichita Business Journal reported:

    When you’re Jeff Fluhr, you don’t spend much time in park — it’s usually full speed ahead.

    It was no different when a couple of members of the Wichita Business Journal’s newsroom visited with the president of Downtown Wichita and the Greater Wichita Partnership in early October.

    On this day, Fluhr was excited to pass out copies of the 42-page 2017 “State of Downtown” report, which had just been released. 1

    The new report is something better than before. 2 Actually, it’s what is left out that marks a step forward for Downtown Wichita, which is the new name for the Wichita Downtown Development Corporation.

    Downtown Wichita brochure.
    Previous versions of the report prominently mentioned the number of daytime workers in downtown Wichita. 3The number most often given was 26,000. But that number is missing from this year’s report. Unless I overlooked it, there is no mention of the number of workers in downtown Wichita.

    Why was this number omitted from this year’s report? Earlier this year I found out that the U.S. Census Bureau data series which was the source of this statistic is not a valid measure of the number of people working downtown. That’s because the series counts all the employees of the Wichita public school district as downtown workers solely because the district’s headquarters building is downtown. 4 This means the statistic is not valid and meaningful, because most school workers don’t work at the downtown building. Instead, they’re working in schools and other facilities dispersed throughout the district. A similar anomaly exists for Wichita city workers: All are counted as though they work in the city hall building. 5

    When I asked Jeff Fluhr, the president of Downtown Wichita, about this he referred my question to Jeremy Hill, the Director of Center for Economic Development and Business Research at Wichita State University. This was — seemingly — reasonable as CEDBR supplied the number to Fluhr’s organization. Hill’s response was unsatisfactory in resolving the issue. In conclusion, Hill wrote to me: “Although the center systematically questions all data sources (federal, state, private, and nonprofit) for reasonableness, limited resources (e.g. time and costs) prevent us from validating and/or cross checking every statistic. In this situation, the center used the appropriate source for the research question and the total number of people estimated to work downtown was within reason.”

    The Census Bureau OnTheMap application for downtown Wichita, zip code 67202. Click for larger.
    LODES data for census block 201730043001036, showing 7,740 workers.
    Here’s what concerns me. This data comes from a Census Bureau application called “OnTheMap.” When using the OnTheMap application for downtown Wichita, which is zip code 67202, there are two large bright blue dots that stand out from all others. These represent the two highest concentrations of workers in downtown Wichita. One is Census block 201730043001036, which has 7,740 employees. This is a one square block area from First to Second Streets, and Wichita to Water Streets. That block, for the year of this data, held the Wichita school district headquarters building.

    7,740 employees is a lot. It’s about one-fourth of the total downtown employee count claimed by Downtown Wichita and CEDBR. It’s more employees than McConnell Air Force Base has, and about twice as many that work at Koch Industries in Wichita.

    Importantly, this number is eleven times the number that work at Cargill, a company which Wichita is granting many millions of dollars in incentives just to retain the company in Wichita.

    Promotional material on the former Henry’s building. Click for larger.
    We just have to wonder: Didn’t anyone look at this data in a serious and critical manner? A quick glance at the data by CEDBR, much less “systematically” checking for “reasonableness” should have led to questions. A quick look by Downtown Wichita staff should have spurred these inquiries: Who do all these people work for in that one block? This is a wonderful success story! How can we replicate this great accomplishment in other blocks in downtown Wichita?

    And didn’t anyone at the City of Wichita — council members and bureaucrats alike — wonder about these numbers?

    That didn’t happen. Or maybe it did, and someone in authority nonetheless decided to proceed to use a statistic that doesn’t mean what city leaders say it means.

    That’s why I wrote it was seemingly reasonable for Fluhr to refer me to CEDBR with my questions about the data. In retrospect, it is clear this is a multi-year episode of incompetence, ineptitude, or dishonesty.

    But at least this statistic is no longer used.

    I asked Cindy Claycomb, who is Chair of the Executive Committee of Downtown Wichita, about this. She replied that all data sources are listed in the report, and that the board relies on the expertise of the Wichita Downtown Development Corporation staff to decide what is presented in each year’s report. She said Jeff Fluhr was the best person to address my concerns. He, as we saw, demurred to CEDBR at WSU.

    (By the way, Claycomb is nearly certain to be elected to the Wichita City Council in November. Jeff Fluhr is now, besides president of Downtown Wichita, also president of Greater Wichita Partnership, the new organization regional governments rely on for economic development.)

    Trends of business activity in downtown Wichita. Click for larger.
    So: How many jobs are in downtown Wichita? There is another series of census data that is better, but not perfect, as it counts private-sector employees only. That data shows 13,581 workers in downtown Wichita for 2015. 6 But what’s remarkable — and disappointing — about this data series is its trend: It’s going down. The recent peak was 16,658 workers in 2008. By 2015 that number was down by 18 percent. (Again, these are private sector workers only.)

    —
    Notes

    1. Horwath, Brian. Downtown positioned for growth, despite area’s labor issues. Wichita Business Journal, October 12, 2017. Available at https://www.bizjournals.com/wichita/news/2017/10/12/downtown-positioned-for-growth-despite-areas-labor.html. ↩
    2. Downtown Wichita. 2017 State of Downtown Report. Available at https://downtownwichita.org/user/file/2017-state-of-downtown-report-download.pdf. ↩
    3. See, for example, the second page of the 2016 report at https://downtownwichita.org/user/file/2016_State_of_Downtown_Report_2.pdf. ↩
    4. In summer 2017 the district moved its headquarters away from downtown to the former Southeast High School. It will be a few years before this is reflected in Census Bureau data. ↩
    5. Weeks, Bob. The claim of 26,000 workers in downtown Wichita is based on misuse of data so blatant it can be described only as malpractice. Downtown Wichita jobs, sort of. Available at https://wichitaliberty.org/wichita-government/downtown-wichita-jobs/. ↩
    6. Weeks, Bob. Downtown Wichita business trends. Available at https://wichitaliberty.org/wichita-government/downtown-wichita-business-trends/. ↩
  • WichitaLiberty:TV: Wichita economy, Kansas schools

    WichitaLiberty:TV: Wichita economy, Kansas schools

    In this episode of WichitaLiberty.TV: Karl Peterjohn and Bob Weeks discuss some statistics regarding downtown Wichita and then the Kansas school finance court decision. View below, or click here to view at YouTube. Episode 169, broadcast October 14, 2017.

    Now, WichitaLiberty.TV has new broadcast times. The regular Sunday broadcasts on KGPT TV channel 26.1 (AT&T U-Verse 49) at 8:30 am, repeated at 4:30 pm, are unchanged. Here is the full broadcast schedule:

    Saturdays on KGPT channel 26.9 (Newsmax TV)
    10:00 am: The new episode
    10:30 am: Repeat of last week’s episode
    5:00 pm: Repeat of new episode
    5:30 pm: Repeat of last week’s episode

    Sundays on KGPT channel 26.1/AT&T channel 49 (Cozi TV)
    8:30 am: Repeat of the new episode
    4:00 pm: Repeat of the new episode
    4:30 pm: Repeat of last week’s episode

    Shownotes

    • Downtown Wichita jobs, sort of. The claim of 26,000 workers in downtown Wichita is based on misuse of data so blatant it can be described only as malpractice.
    • The Kansas Supreme Court decision in Gannon v. State.
    • Wichita Eagle coverage of USD 259 internet contract: Wichita district pays more in hopes of preventing internet service disruptions, Wichita school district leaving out the details, and Spending was response to cyber attacks, Wichita board president says.
    • The Rose Standards for Kansas students, as codified in K.S.A. 2016 Supp. 72-1127:
      (1) Sufficient oral and written communication skills to enable students to function in a complex and rapidly changing civilization;
      (2) sufficient knowledge of economic, social, and political systems to enable the student to make informed choices;
      (3) sufficient understanding of governmental processes to enable the student to understand the issues that affect his or her community, state, and nation;
      (4) sufficient self-knowledge and knowledge of his or her mental and physical wellness;
      (5) sufficient grounding in the arts to enable each student to appreciate his or her cultural and historical heritage;
      (6) sufficient training or preparation for advanced training in either academic or vocational fields so as to enable each child to choose and pursue life work intelligently; and
      (7) sufficient levels of academic or vocational skills to enable public school students to compete favorably with their counterparts in surrounding states, in academics or in the job market.

  • Sales tax incentives yes, but no relief on grocery sales tax

    Sales tax incentives yes, but no relief on grocery sales tax

    Is it equitable for business firms to pay no sales tax, while low-income families pay sales tax on groceries?

    Last week I wondered if the city’s agenda packet for economic development incentives proposed for BG Products was complete. 1 Since the city’s narrative had no mention of a sales tax exemption, but the accompanying ordinance that was passed authorized a sales tax exemption, I wondered if the analysis performed by the Wichita State University Center for Economic Development and Business Research was correct.

    Now that I’ve received the document, it appears that CEDBR’s analysis properly included the cost of the sales tax exemption incentive. 2 The city’s narrative did not mention the sales tax exemption.

    According to the CEDBR analysis, the sales tax exemption has a cost of $368,417. It is shared among the city, county and state, with 88 percent born by the state. 3

    From a public policy perspective, we must wonder whether this incentive, and the other incentives BG Products received, are necessary for the company to proceed with its expansion in Wichita. The Industrial Revenue Bond program, which is the enabler of these incentives, does not require the applicant companies to demonstrate financial need. There are a few requirements, but none have to do with economic or financial necessity. 4

    The State of Kansas applies the full sales tax rate to groceries, and is one of the few states to do this. 5 This tax disproportionally harms low-income families. 6 This is a problem in equity, in that business firms may request sales tax exemptions without showing need, while low-income families have no way to avoid the sales tax on their groceries.

    —
    Notes

    1. Weeks, Bob. Wichita Business Journal grants city council excess power. Available at https://wichitaliberty.org/wichita-government/wichita-business-journal-grants-city-council-excess-power/. ↩
    2. Analysis by Center for Economic Development and Business Research at Wichita State University. Available at https://drive.google.com/file/d/0B97azj3TSm9MZXJaOVhzUzBJc2M/. ↩
    3. From the analysis performed by the city by Center for Economic Development and Business Research at Wichita State University, these are the values of the sales tax incentives:
      City: 29,109
      County: 14,308
      State: 325,000
      Total: 368,417
      With the sales tax rate of 7.50%, this implies taxable spending of $4,912,227. ↩
    4. “The percentage of taxes abated is based on capital investment and job creation. Majority of goods or services sold must be destined for customers outside of the Wichita Metropolitan Statistical Area (MSA). Company must pay average wages equal to or greater than the industry or Wichita MSA wage rate. City benefit/cost ration must be at least 1.3 to 1.” City of Wichita, Economic Development Incentives. Available at http://www.wichita.gov/Economic/Pages/Incentives.aspx. ↩
    5. “Kansas has nearly the highest statewide sales tax rate for groceries. Cities and counties often add even more tax on food.” Weeks, Bob. Kansas sales tax on groceries is among the highest. Available at https://wichitaliberty.org/kansas-government/kansas-sales-tax-groceries-among-highest/. ↩
    6. “Analysis of household expenditure data shows that a proposed sales tax in Wichita affects low income families in greatest proportion, confirming the regressive nature of sales taxes.” Weeks, Bob. Wichita sales tax hike harms low income families most severely. Available at https://wichitaliberty.org/wichita-government/wichita-sales-tax-hike-harms-low-income-families-severely/. ↩
  • Wichita Business Journal grants city council excess power

    Wichita Business Journal grants city council excess power

    The Wichita Business Journal and the City of Wichita team to provide incorrect coverage and missing analysis.

    Today the Wichita Business Journal reported: “An $11.5 million expansion of the Wichita operations of BG Products has been given the go-ahead. The Wichita City Council on Tuesday approved the expansion plan and issued industrial revenue bonds for the project.” 1

    The problem with this reporting is that BG Products was not asking for the city’s permission to expand its operations, as the first sentence implies. Nor did the council approve an expansion plan, as the second sentence plainly states.

    Instead, today the council granted BG Products an exemption from paying property taxes estimated at $204,280 per year for the next five years, and possibly another five years. This is how the industrial revenue bond program works in Kansas. Cities do not lend money. Instead, they grant exemptions from paying taxes. 2

    (BG has agreed to pay $5,143 per year, the present taxes on a building being razed.)

    While the agenda packet for the meeting specified BG’s plans for the bond proceeds, the proposed uses of the funds have little — nothing, really — to do with qualifying for IRBs. 3

    So it’s curious as to why the agenda packet details the company’s plans for the bond proceeds. It’s even more curious why city economic development analyst Tim Goodpasture spent quite a bit of time briefing council members on these plans. Except: His Twitter handle is @goodybagict.

    While the agenda packet supplies the estimated amount of property tax exemption granted to BG products, the city’s analysis makes no mention of the amount of sales tax BG may escape paying. Sales tax exemptions are another feature of IRBs in addition to property tax exemptions. While the city’s analysis doesn’t mention sales tax, section 5 of the ordinance passed by the council states the city has determined BG is entitled to a sales tax exemption of unspecified amount.

    Since the city’s analysis of the proposal did not include mention of sales tax, we’re left to wonder whether the Wichita State University Center for Economic Development and Business Research incorporated the sales tax exemption in the analysis it performs for the city.

    —
    Notes

    1. Heck, Josh. Council green-lights company’s $11.5M expansion. Wichita Business Journal, September 12, 2017. Available at https://www.bizjournals.com/wichita/news/2017/09/12/council-green-lights-companys-11-5m-expansion.html. ↩
    2. Weeks, Bob. Industrial revenue bonds in Kansas. Available at https://wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/. ↩
    3. “The percentage of taxes abated is based on capital investment and job creation. Majority of goods or services sold must be destined for customers outside of the Wichita Metropolitan Statistical Area (MSA). Company must pay average wages equal to or greater than the industry or Wichita MSA wage rate. City benefit/cost ration must be at least 1.3 to 1.” City of Wichita, Economic Development Incentives. Available at http://www.wichita.gov/Economic/Pages/Incentives.aspx. ↩

  • More Cargill incentives from Wichita detailed

    More, but likely not all, of the Cargill incentives will be before the Wichita City Council this week.

    A division of Cargill, Cargill Meat Solutions Corporation, is moving from an office on North Main Street in downtown Wichita to the site of the former Wichita Eagle building, also in downtown Wichita. Last year it was widely reported that Cargill was considering moving this division to another city. Reports of incentives offers to Cargill from other cities spurred the City of Wichita to offer its own incentives if Cargill would remain in Wichita. This week the city council will consider additional subsidies and incentives besides those already offered. 1

    As summarized in the agenda packet:

    “In exchange for Cargill’s commitment, the City has negotiated the following:

    • Issue Industrial Revenue Bonds (Letter of Intent approved April 18, 2017) 100% property tax abatement; 5+5 year basis
    • Sales tax exemption
    • Acquisition of a 15 year parking easement for public access to the garage in the evenings and on weekends (estimated cost of $6,500,000)
    • Expedited plan review (50% reduction in time)
    • Reduced permitting fees (50%) (estimated savings of $85,000)
    • Assign a project manager/ombudsman for a single point of contact for the company”

    Industrial Revenue Bonds

    In April the city council approved a letter of intent regarding Cargill’s participation in the Industrial Revenue Bond program. 2 The city won’t be lending Cargill money. Instead, IRBs are a (convoluted) method whereby local governments are able to forgive the payment of property taxes. For the case of Cargill, city documents from April state the tax forgiveness could be worth $1,359,531 per year. 3 This would be shared by these taxing jurisdictions in these annual amounts, again according to city documents:

    • City of Wichita: $378,450
    • Sedgwick County: $340,958
    • USD 259, the Wichita Public School District: $622,723
    • State of Kansas $17,400

    The property tax savings will probably be greater, if Cargill spends as much as it has agreed to spend and the appraiser values the building accordingly. Rough calculations indicate tax savings as much as $1,755,000 per year. 4

    Cargill has agreed to make an annual Payment-In-Lieu-Of-Taxes (PILOT) of $413,900, according to city documents.

    In addition to the property tax exemption, the IRBs also carry a sales tax exemption for purchases related to construction. City documents give an estimated value of $2,026,291 for the sales tax Cargill will not have to pay. 5

    Parking easement

    At one time, it was thought that the city would build a parking garage and let Cargill use it an no cost, or at a greatly reduced cost. Instead, the city now proposes that Cargill build the garage and the city will acquire an easement. This has sounded almost benign, but now we realize that the city will pay Cargill an estimated $6.5 million. In return, the city will be able to use up to approximately 700 parking spaces outside of Cargill business hours.

    Is this a good deal for the city? The city has agreed to pay $9,286 for the use of each parking space. 6 For comparison, recently the city rehabilitated the parking garage at 215 S. Market at a cost of $17,609 per parking space. The city rents 180 of these to a nearby company at the rate of $35 per month, which is $420 per year. 7

    To repeat: The city has agreed to pay Cargill $9,286 for something it charges others $420 per year.

    It is not known whether the city will charge fees to the public to use the garage. It is also unknown whether there is much demand for public parking at the Cargill location, but present market conditions would suggest there is not much additional demand.

    Expedited plan review, reduced fees, and ombudsman

    The city has agreed to cut permit fees and speed response time for approvals. 8

    This incentive — the need for it and its value to Cargill — is an explicit admission that City of Wichita regulations are burdensome. If not, why would the city devote time and expense to helping Cargill obtain relief from these regulations?

    Consider this aspect of public policy: Cargill is a large company with — presumably — fleets of bureaucrats and lawyers trained to deal with burdensome government regulation. These costs can be spread across a large company, meaning that Cargill can afford to overcome burdensome regulations.

    But what about the small companies that don’t have fleets of bureaucrats and lawyers? Small companies that can’t spread the costs of regulation across a large volume of business? What will the city do for these companies? This is especially important because the spirit of entrepreneurship the city wants to cultivate is most commonly found in small, young, companies — the type of company without fleets of bureaucrats and lawyers.

    The city says it would do for any company what it is doing for Cargill. Except: How are companies supposed to know to ask for regulatory relief, streamlining, and a discount on fees?

    If the city really wants to help all companies, it would — at its own initiative — cut fees and reduce response time across the board, for everyone. Until then Wichita offers special regulatory treatment for special circumstances, which widens the gulf between the haves and have-nots. 9

    Other subsidy programs

    The agenda packet for the city council meeting doesn’t mention this, but from the state of Kansas Cargill is likely to receive PEAK benefits. Under this program, the Kansas state withholding tax deducted from Cargill employees’ paychecks will be routed back to Cargill. 10 (Not all; only 95 percent.) Some very rough calculations show that PEAK benefits might be worth some $2 million annually to Cargill. 11

    Ironically, with the recent increases in Kansas income taxes, PEAK is even more valuable to Cargill.

    Is this needed?

    In the past, economic development subsidies of this type were justified by local governments as necessary to recruit new companies to the area. These subsidies, however, are used simply to retain a company that is already located in downtown Wichita.

    The city has asked Wichita State University’s Center for Economic Development and Business Research to produce benefit/cost ratios. They show that the costs the city, county, and state incur will generate benefits that exceed these costs. For the school district, costs exactly equal benefits — a remarkable coincidence.

    The reasoning and calculation behind these benefit/cost ratios is opaque. The general idea is that spending by a company spawns other spending that results in economic benefit and growth. That’s true. It’s important to know, however, that this benefit also occurs when companies move to Wichita or expand in Wichita, without the benefit of economic development subsidies.

    The question, then, becomes are these incentives necessary? Would Cargill have moved to another city if not for these incentives? It’s only if Cargill would have left Wichita that the benefit/cost ratios have any meaning.

    The City of Wichita says Cargill received lucrative offers from other cities. But these offers have not been seen, to my knowledge. We’re left to take the word of Cargill that it received offers from other cities, and that it would have moved from Wichita if not for Wichita’s incentives.

    Cargill, as we’ve seen, has a multi-million dollar motive. City of Wichita officials also have a large motive, as do officials and politicians at the state level. The politicians and bureaucrats want to — need to — be seen as doing something to improve the economy. It costs none of them one dime to pay these incentives. But the Cargill building will fulfill their ediface complex when they preside at groundbreaking and ribbon-cutting ceremonies.

    If Wichita leaders wanted to gain the trust of Wichitans, to have us believe and understand that these incentives are necessary to keep Cargill in Wichita, the city could reveal the other offers Cargill received. Cargill itself could reveal offers it received from other cities. These actions would help Wichitans understand whether these incentives are truly needed. But the world of economic development incentives is a murky swamp.

    Finally, Mayor Jeff Longwell, other council members, and city hall bureaucrats tell us that the city has moved beyond cash incentives. Cash will not be paid for jobs, they say.

    But forgiving a tax bill is just like paying cash. Discounting the cost of permits is just like paying cash. Paying $6.5 million to use a company’s parking garage during hours the company has no use for it: How is that different from simply paying the company a cash incentive?

    Perhaps the mayor and others have a different understanding of the economics of transactions than I.

    —
    Notes

    1. City of Wichita. Agenda Packet for July 18, 2017. Approval of Development Agreement with Cargill Meat Solutions Corporation. ↩
    2. Weeks, Bob. Industrial revenue bonds in Kansas. http://wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/. ↩
    3. City of Wichita. Council agenda packet for April 18, 2017. ↩
    4. “The Office Building will consist of approximately 170,000 square feet space to be used primarily for Class A office space at an estimated construction cost of approximately $71,736,290, including, without limitation, land acquisition costs and the costs of construction of the Parking Garage.” Agenda packet for July 18, 2017. But the city has limited the value of the IRBs at $60 million. Calculation: $60,000,000 x 25% assessment rate for commercial property x approx. 117 mill rate / 1000 = $1,755,000 tax savings per year. ↩
    5. Weeks, Bob. Cargill subsides start forming. Available at https://wichitaliberty.org/wichita-government/cargill-subsides-start-forming/. ↩
    6. $6,500,000 / 700. ↩
    7. Weeks, Bob. Why is this man smiling? Available at https://wichitaliberty.org/wichita-government/man-smiling/. ↩
    8. “Section 4.03. Approvals. The City agrees to provide a 50% reduction in the fees charged by the City for permits and approvals, including plan review, utility and building permitting fees, for all matters related to the Project. The City also agrees to reduce the response time for approval of building plans from the standard 30 days to 15 days for all matters related to the Project.” Also: “The reduction in the permitting fees will be paid from the Economic Development fund.” ↩
    9. Weeks, Bob. Regulation in Wichita, a ‘labyrinth of city processes.’ Available at https://wichitaliberty.org/regulation/regulation-wichita-labyrinth-city-processes/. ↩
    10. Weeks, Bob. In Kansas, PEAK has a leak. http://wichitaliberty.org/kansas-government/kansas-peak-leak/. ↩
    11. For the first year of the agreement, Cargill is expected to have 750 or more employees at an average salary of $66,814. That annual salary / 26 pay periods = $2,570 biweekly. For a family with two children (this is just a guess and could be way off), there are two withholding allowances, so $2,570 – ($86.54 x 2) = $2,397. Using the new withholding tables for married workers (another assumption), bi-weekly withholding is $48.17 + 5.7% x ($2,397 – $1,298) = $48.17 + $62.64 = $110.81. That means $2,881 annual withholding, so Cargill’s 95% share is $2,737. For 750 employees, this is an annual subsidy to Cargill of $2,052,750. ↩
  • WichitaLiberty.TV: John Todd and Wichita issues

    WichitaLiberty.TV: John Todd and Wichita issues

    In this episode of WichitaLiberty.TV: John Todd joins Bob Weeks and Karl Peterjohn to discuss issues involving the City of Wichita, including the future of Naftzger Park and economic development. View below, or click here to view at YouTube. Episode 157, broadcast July 9, 2017.

    Shownotes

    • Wichita Pachyderm Club on Facebook
    • Article link: An information resource regarding the future of Naftzger Park in downtown Wichita
    • Article link: Downtown Wichita business trends: There has been much investment in Downtown Wichita, both public and private. What has been the trend in business activity during this time?
    • Article link: Downtown Wichita jobs, sort of: The claim of 26,000 workers in downtown Wichita is based on misuse of data so blatant it can be described only as malpractice.
    • Article link: Wichita economic dashboards

  • Coverage of Downtown Wichita workers

    Coverage of Downtown Wichita workers

    The Wichita Eagle’s coverage of the number of workers in Downtown Wichita isn’t fake news, just wrong news.

    A recent Wichita Eagle article reported on the number of workers in downtown Wichita, designated as zip code 67202: “The 67202 ZIP code had lost nearly 15 percent of its businesses and 20 percent of its employees in the decade ending in 2015, according to the U.S. Census’s County Business Pattern data. The loss of the State Office Building in 2016 and the Wichita school district’s downtown office this summer — employees are moving to the former Southeast High School — will make that decline steeper.” 1

    Trends of business activity in downtown Wichita. Click for larger.
    In the first sentence, the reporter is correct. The trend in the number of business establishments, the number of employees, and the annual payroll is downwards. 2

    But the second sentence reveals a misunderstanding of the meaning of two sets of Census Bureau data. According to the Census Bureau’s description of the County Business Pattern data — that’s the data referenced in the article — the two events mentioned will not change the CBP data. That’s because governmental agencies are not included in CPB data. The Census Bureau plainly explains:

    “Statistics are available on business establishments at the U.S. level and by State, County, Metropolitan area, ZIP Code, and Congressional District Levels. … CBP covers most NAICS industries excluding crop and animal production; rail transportation; National Postal Service; pension, health, welfare, and vacation funds; trusts, estates, and agency accounts; private households; and public administration. CBP also excludes most establishments reporting government employees.” 3

    LODES data for census block 201730043001036, showing 7,740 workers.
    A second set of Census Bureau data known as LODES will change with the departure of USD 259 from zip code 67202. LODES is the source of 26,000 downtown Wichita workers claimed by Wichita State University’s Center for Economic Development and Business Research, the Wichita Downtown Development Corporation, the Greater Wichita Partnership, the City of Wichita, and other agencies. An earlier Eagle article from May 10 just scratched the surface on this topic. 4 That article described the Census Bureau data as erroneous. But there is no error in the data, as the Census Bureau plainly explains what the data means. 5 The error was in the application of the data by someone who used it to represent something it does not represent.

    Readers of the Wichita Eagle may be thoroughly confused by now. Can we expect a correction or explanation? The Eagle says no.

    —
    Notes

    1. Voorhis, Dan. The hottest real estate spot in Wichita? Downtown on Douglas. Wichita Eagle, May 20, 2017. Available at http://www.kansas.com/news/business/real-estate-news/article151746232.html. ↩
    2. Weeks, Bob. Downtown Wichita business trends. Note that CBP data includes businesses only, not most public sector workers. Available at https://wichitaliberty.org/wichita-government/downtown-wichita-business-trends/. ↩
    3. U.S. Census Bureau. County Business Patterns (CBP): About this Program. Available at https://www.census.gov/programs-surveys/cbp/about.html. ↩
    4. Morrison, Oliver. Likely error overestimates downtown Wichita workers. Wichita Eagle, May 10, 2017. Available at http://www.kansas.com/news/local/article149848144.html. ↩
    5. Weeks, Bob. Downtown Wichita jobs, sort of. The claim of 26,000 workers in downtown Wichita is based on misuse of data so blatant it can be described only as malpractice. Available at https://wichitaliberty.org/wichita-government/downtown-wichita-jobs/. ↩