Tag Archives: Dave Unruh

The finances of Intrust Bank Arena in Wichita

A truthful accounting of the finances of Intrust Bank Arena in downtown Wichita shows a large loss. Despite hosting the NCAA basketball tournament, the arena’s “net income” fell.

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.

Intrust Bank Arena Payments to Sedgwick County. Click for larger
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.

This agreement specifies a revenue sharing mechanism between the county and SMG. For 2108, the accounting method used in this agreement produced a profit, or “net building income,” of $647,634 to be split (not equally) between SMG and the county. The county’s share was $123,817. 1

Intrust Bank Arena Payments to Sedgwick County. Click for larger.
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.” 2

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 2018 Comprehensive Annual Financial Report for Sedgwick County. 3 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 in 2018, 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 $4.5 million. The loss can be attributed to $4.8 million in depreciation expense.

Financial statements in the same document show that $4,783,229 was charged for depreciation in 2017. If we subtract the SMG payment to the county of $123,817 from depreciation expense, we learn that the Intrust Bank Arena lost $4,659,412 in 2018.

(Of note, 2018 was the year the arena hosted a round of NCAA men’s basketball tournament games. For that year, the payment from SMG to the county was down by 58.8 percent from $300,414 in 2017. Attendance rose by 4.2 percent.)

Depreciation expense is not something that is paid out in cash. That is, Sedgwick County did not write a check for $4,659,412 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 2018 decreased by $4.7 million to $151.6 million. Of that $151.6 million, $142.9 million is invested in capital assets. The decrease can be attributed to depreciation, which was $4.8 million.” 4 (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 Eagle reported: “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.

In 2018, the Wichita Eagle reported, based on partial-year results: “Intrust Bank Arena remains profitable but is reporting a 20 percent drop in income this year, despite a bump from the NCAA March Madness basketball tournament. Net income for the first three quarters of this year was about $556,000. That’s down from just shy of $700,000 last year, according to a report to the Sedgwick County Commission.” 5 This use of “profitable” is based only on the special revenue-sharing agreement, not generally accepted accounting principles.

Even our city’s business press — which ought to know better — writes headlines like Intrust Bank Arena tops $1.1M in net income for 2015 without mentioning depreciation expense or explaining the non-conforming accounting methods used to derive this number.

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.


Notes

  1. The Operations of INTRUST Bank Arena, as Managed by SMG. Independent Auditor’s Report and Special-Purpose Financial Statements. December 31, 2018. Available here.
  2. Ibid, pages 4 and 7.
  3. Sedgwick County. Comprehensive Annual Financial Report of the County of Sedgwick, Kansas for the Year ended December 31, 2018. Available at https://www.sedgwickcounty.org/finance/comprehensive-annual-financial-reports/.
  4. CAFR, page A-10.
  5. Lefler, Dion. Despite March Madness, Intrust Bank Arena profit down 20 percent. December 7, 2018. Available at https://www.kansas.com/news/politics-government/article222300675.html.

Retiring Sedgwick County Commissioner Dave Unruh praised

The praise for retired Sedgwick County Commissioner Dave Unruh can’t be based on our region’s accomplishments under his guidance. That is, if people are informed and truthful.

In January a group of Wichita business leaders submitted an op-ed to the Wichita Eagle to mark the retirement of Sedgwick County Commissioner Dave Unruh. I quote portions here, with emphasis added:

He easily won re-election because his constituents and the rest of us knew he was dedicated to strengthening our community, region and the state.

In economic development Commissioner Unruh was chairman in 2006 when the board voted to build a world-class technical-education facility to ensure we remained competitive for new jobs. The National Center for Aviation Training is home to the growing WSU Tech. He also championed smart economic development programs that generated additional tax dollars and regional cooperation through REAP and other efforts.

In his perseverance to get things done and his belief in our future, he’s made a difference.

On Sunday, the Wichita Eagle published a drawing by cartoonist Richard Crowson which lauded Unruh’s championing of the Intrust Bank Arena, Sedgwick County Zoo, Exploration Place, and mental health services. Responding on his Facebook profile, Commissioner Michael O’Donnell wrote this for public consumption:

“A society grows great when old men plant trees whose shade they know they will never sit in” I believe this Greek proverb sums up the leadership of Dave Unruh as much as this stupendous Wichita Eagle cartoon. Our community has been blessed by the selfless and indelible leadership of Dave Unruh. I believe he was the most consequential local leader in our region for the last 2 decades and those of us fortunate enough to live in Sedgwick County are able to sit under the countless trees which Dave planted for us and our families for generations to come.

There’s another way to look at the Dave Unruh legacy in Sedgwick County, and that is through the lens of data. A shiny downtown area is nice, but not as nice as a prospering economy. Here are some figures.

In 2001, the year when Unruh assumed office in its first month, the median household income in Sedgwick County was higher than that of both Kansas and the United States. By 2017, Unruh’s last full year on the commission, Sedgwick County had fallen behind both, and by significant margins.

In 2001, the poverty rate in Sedgwick County was lower than that for the nation. By 2017, the situation was reversed: The Sedgwick County poverty rate is now higher, and significantly higher.

Looking at other measures of prosperity, we see Sedgwick County falling behind during the time Unruh was in office. Gross domestic product, personal income, per capita personal income, population, total employment, wage and salary employment, and manufacturing employment: In all these measures Sedgwick County underperformed the nation, and usually the State of Kansas. (GDP is available only for the Wichita metropolitan area, which is dominated by Sedgwick County.)

By himself, Dave Unruh isn’t responsible for this economic performance. Many others contributed at Wichita City Hall and the Kansas Capitol, as well as some of Unruh’s colleagues on the Sedgwick County Commission. Unruh and they supported the interventionist, corporatist model of economic development, and it hasn’t worked. That’s why it’s surprising to see so much praise for Unruh. It’s sad, too, because if business leaders and politicians really believe the “Unruh way” is the way that works, the outlook for our region is bleak.

Unruh recollections disputed

A former Sedgwick County Commissioner disputes the narrative told by a retiring commissioner.

By Karl Peterjohn
A version of this appeared in the Wichita Eagle.

Lame duck county commissioner Dave Unruh’s recent commentary (“It’s time to set the record straight.” December 14, 2018 Wichita Eagle.) is an attempt to re-write county commission history. Senator Daniel Patrick Moynihan said, “You are entitled to your own opinion, but you are not entitled to your own facts.” Here are county commission facts correcting the commentary fiction:

Commissioner Unruh was deeply involved in both the hiring, and recent firing, of county manager Scholes by Commissioner Unruh. I know because I was involved in Scholes’ hiring, but as a citizen, publicly opposed the firing of General Scholes, as well as county counselor, Judge Eric Yost in 2018.

The group of county manager candidates were evaluated by all five county commissioners three years ago. Three county commissioners ranked General Scholes as the best candidate. Commissioner Unruh was one of these three commissioners.

I wasn’t one of these three. While I ranked General Scholes highly, I ranked one other candidate as slightly better in our final candidate evaluations. I readily admit that I was very comfortable in agreeing with my three colleagues in hiring General Scholes. This was followed by all five commissioners: Unruh, Tim Norton, Jim Howell, Richard Ranzau, and myself voting to hire General Scholes.

Commissioner Unruh’s inaccurate commentary is part of an effort to provide an excuse for the scandalous mess that has engulfed the current county commission majority resulting in a variety of FBI and state investigations after Commissioner Michael O’Donnell’s criminal indictments. However, only Commissioner Unruh was part of the current commission majority (Unruh, O’Donnell, and David Dennis) involved in both this hiring, and supporting the firing of both General Scholes, and the county counselor, Judge Eric Yost.

This is important because there also seems to be some confusion by Commissioner Dennis about the powers of former Sedgwick County Commissioners like myself. In December, Commissioner Dennis publicly claimed that I was in some way responsible for this personnel debacle and the financial mess created by the current progressive-moderate commission majority in firing first Judge Yost, and then General Scholes.

I reject this ludicrous claim. My impact on Sedgwick County finances ended the day I left the commission in January, 2017. Anyone on the county commission who claims otherwise is trying to hide their own malfeasance. I believe that Commissioner Dennis should apologize to me for his fabulist statement. Sedgwick County citizens also deserve an apology for this commission majority’s misconduct in mishandling county staff, and finances. I have asked Commissioner Dennis for an apology for his statement attacking me, and publicly do so again with this letter.

Sedgwick County tops $434K in extra personnel costs

Sedgwick County has spent $434,663 in costs relating to the separations of two members of top management.

Through December 21, 2018, Sedgwick County had spent $434,663 on matters relating to former County Counselor Eric Yost and former County Manager Michael Scholes. The bulk of the costs were severance payments to both. There was also $89,375 for a study of matters related to county management. Additionally, there were attorney fees for Yost, Scholes, and all county commissioners except Michael O’Donnell.

Click here to view the report prepared by county financial staff.

Pete Meitzner for Sedgwick County?

In normal times, Republicans may be reluctant to vote for a Democrat for the Sedgwick County Commission. But these are not normal times, and a vote for Pete Meitzner sends a message that we just don’t care about our economy.

If you’ve been following analyst James Chung — and it seems like everyone has — he’s delivered a sobering message: The Wichita economy has not been growing. “[Wichita has been] stuck in neutral for about three decades, with basically no growth, amidst the landscape of a growing U.S. economy,” he said. (In 2017 the Wichita economy shrank from the previous year.)

Chung says we need to change our ways. In his June visit he said, and the Chung Report wrote, “Every market signal points to the same conclusion: The manner in which Wichita is operating during this critical point in our history is just not working.”

So what needs to change? Chung doesn’t say, but here are two things:

First, there are some elected officials and bureaucrats who have presided over the stagnation of the Wichita-area economy. These people need to go.

Second, there are also institutions that are problems, with one glaring example. In one way or another, the Wichita Regional Chamber of Commerce has taken the lead in economic development for many years. In recent years the Chamber ran Greater Wichita Economic Development Coalition. Now the effort has been split off to a non-profit corporation, the Greater Wichita Partnership.

That sounds good, but under the hood it’s the same leadership and the same methods, although with a few new hired hands.

So when James Chung (and others) says our manner of operation is not working, it’s the Wichita Chamber of Commerce and its ecosystem that must assume a large portion of blame.

That Chamber ecosystem is pumped up and funded by the City of Wichita and Sedgwick County. Bureaucrats and elected officials on those bodies who have supported these economic development efforts must be dismissed.

At the top of this list is Wichita City Council Member Pete Meitzner (district 2, east Wichita). He’s running as a Republican for an open position on the Sedgwick County Commission in east Wichita.

Why should voters reject Pete Meitzner? That’s a good question, because on his campaign web page he promotes his experience: “Pete’s seven years on the City Council has proven to be a large part of the positive momentum we have recently experienced.”

He’s endorsed by the retiring county commissioner he seeks to replace. Again, from his campaign page, there’s this from Sedgwick County Commissioner Dave Unruh: “Pete displays leadership that produces results. We need to only look to the City of Wichita’s recent successes to see the type of leadership Meitzner is capable of. His enthusiasm and business-minded approach to challenges has greatly helped create the positive momentum that Wichita experiences today. Sedgwick County needs Meitzner’s leadership.”

Click for larger.

Let’s compare these claims to the record. Nearby is a chart of nonfarm jobs in the Wichita metropolitan area. I’ve identified when Unruh and Meitzner took office. As you can see, when Unruh took office there had been a downturn. But the Wichita economy improved, although slower than the national economy.

When Meitzner took his position on the city council, there had also been a downtown. The national economy recovered. But the Wichita-area economy has not recovered. As time passes, the gap between the Wichita and national economy grows.

Wichita and national GDP. Click for larger.

There are other indicators besides jobs that illustrate the performance of the Wichita-area economy. Gross Domestic Product, the total value of everything produced, has fallen.

Click for larger.

Real personal income fell in 2016, the last year for which there is data. Over the years, its growth in Wichita has been slower than most other areas.

To see how others evaluate the Wichita-area economy, consider the Brookings Institution Metro Monitor. From Brookings you can also learn that Wichita exports are falling.

Is the record of Dave Unruh relevant when considering whether to vote for Pete Meitzner? Yes. Meitzner praises Unruh’s record: “His (Unruh’s) legacy of 16 years of professionalism … has been many successes and often the calm in the storm that’s been of recent,” Meitzner said. “There’s a strong feeling in the community that what we’re doing in the city and in the region is really moving in the right direction. I can help the county have our oars in the water going the same way as the whole region.” (“Wichita City Council member hopes to become calming force on County Commission” Wichita Eagle, February 13, 2018.)

Except: the legacy of Unruh in economic development is stagnation and falling behind, as is Meitzner’s record on the city council. As for “professionalism” and “calm in the storm,” we must take notice that the FBI is investigating Unruh for “potential obstruction of justice based on possible whistleblower retaliation.” (“FBI investigating possible obstruction of justice in Sedgwick County Commission” Wichita Eagle, October 23, 2018.)

Despite all the evidence, Meitzner is running on his record. His campaign literature says he is committed to “Maintaining his track record of successful ECONOMIC DEVELOPMENT.” He praises the Wichita city manager, the city bureaucracy, and our economic development machinery for doing a good job. He believes these are doing the right thing.

This demonstrates another problem. Besides presiding over our region’s poor economic performance, Meitzner (and Unruh) do not acknowledge the problem. To them, there is “momentum.” We’re “really moving in the right direction,” Meitzner says.

For someone to say these things, they must be either blissfully ignorant, a blatant liar, or someone who wants to be in office so badly that they’ll say anything to be elected.

Republicans may be reluctant to vote for a Democrat for the Sedgwick County Commission. In normal times, I am too. But these are not normal times, and a vote for Pete Meitzner sends a message that we just don’t care about our economy.

WichitaLiberty.TV: Richard Ranzau and Renee Duxler

In this episode of WichitaLiberty.TV: Sedgwick County Commissioner Richard Ranzau explains the current problems with corruption in the county. Then, Renee Duxler tells us why she’s running for Sedgwick County Commission. View below, or click here to view at YouTube. Episode 215, broadcast October 28, 2018.

Shownotes

Intrust Bank Arena loss for 2017 is $4,222,182

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

Intrust Bank Arena Payments to Sedgwick County. Click for larger.
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.

Trends of events and attendance at Intrust Bank Arena. Click for larger.
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 Eagle reported: “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.

Even our city’s business press — which ought to know better — writes headlines like Intrust Bank Arena tops $1.1M in net income for 2015 without mentioning depreciation expense or explaining the non-conforming accounting methods used to derive this number.

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.


Notes

  1. Management Agreement between Sedgwick County and SMG. August 1, 2007. Available here.
  2. Minutes of the Sedgwick County Commission, February 14, 2018.
  3. Management Agreement between Sedgwick County and SMG.
  4. Sedgwick County. Comprehensive Annual Financial Report of the County of Sedgwick, Kansas for the Year ended December 31, 2017. Available at https://www.sedgwickcounty.org/media/39501/2017-cafr.pdf.
  5. Ibid.

From Pachyderm: Local legislative priorities

From the Wichita Pachyderm Club: Local government officials present their legislative priorities. Appearing are James Clendenin for the City of Wichita, Dave Unruh for Sedgwick County, and Sheril Logan for the Wichita Public School District. This was recorded December 22, 2017.

Intrust Bank Arena loss for 2016 is $4,293,901

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 hides the true economics of the arena. What’s missing is depreciation expense.

An example: In February 2015 the Wichita Eagle reported: “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.”

Even our city’s business press — which ought to know better — writes headlines like Intrust Bank Arena tops $1.1M in net income for 2015 without mentioning depreciation expense.

All of these examples are deficient in an important way, and contribute confusion to the search for truthful accounting of the arena’s finances. As shown below, recognizing depreciation expense is vital to understanding profit or loss, and the “net income” referred to above doesn’t include this. In fact, the “net income” cited above isn’t anything that is recognized by standard accounting principles.

The problem with the reporting of Intrust Bank Arena profits

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 2106, the accounting method used in this agreement produced a profit of $680,268 to be split (not equally) between SMG and the county. The county’s share was $140,134. 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 2016 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 $4.6 million. The loss can be attributed to $4.4 million in depreciation expense.

Financial statements in the same document show that $4,434,035 was charged for depreciation in 2016, bringing accumulated depreciation to a total of $35,126,958.

If we subtract SMG payment of $140,134 from depreciation expense, we learn that the Intrust Bank Arena lost $4,293,901 in 2016.

Depreciation expense is not something that is paid out in cash. That is, Sedgwick County did not write a check for $4,434,035 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 public leaders recognize this. 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.”

Earlier in this article we saw examples of the (then) Sedgwick County Assistant Manager, the Intrust Bank Arena manager, and several Wichita Eagle writers making the same mistake.

Intrust Bank Arena commemorative monument
Intrust Bank Arena commemorative monument
The contention — witting or not — of all these people 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.

We see our governmental and civic leaders telling us that we must “run government like a business.” Without frank and realistic discussion of numbers like these and the economic facts they represent, we make decisions based on incomplete and false information.


Notes

  1. Management Agreement between Sedgwick County and SMG. August 1, 2007. Available here.
  2. The Operations of INTRUST Bank Arena, as Managed by SMG. December 31, 2016. Available here.
  3. Ibid.
  4. Sedgwick County. Comprehensive Annual Financial Report of the County of Sedgwick, Kansas for the Year ended December 31, 2016. Available here.

For Sedgwick County Commission, too much debate

By moving to end motions and debate, the Sedgwick County Commission isn’t effectively serving citizens and taxpayers.

Yesterday’s meeting of the Sedgwick County Commission offered an opportunity to learn how we can improve local government.

The issue the commission was considering, significant in its own right, is not important to the following discussion. It’s the process that needs improvement.

There was a proposed ordinance. Commissioner Jim Howell offered two amendments — really substitute motions — that altered the proposed ordinance. Each failed by votes of three to two.

Howell had two more motions to offer. But Commissioner David Dennis moved a motion to end the offering of additional motions. In this vote the majority prevailed, and Howell was silenced. Commissioners voting to end debate were Chair Dave Unruh, Michael O’Donnell, and Dennis. Richard Ranzau and Howell opposed the motion to end debate.

The county commission is not a deliberative body like a legislature. The county does not have committees like a legislature. I’m not advocating for the county to form committees, but here’s what is missing from the county process: There is no opportunity for interested parties — often lobbyists, but also regular people — to testify before a committee as legislation is being developed. There is no committee mark-up process in which the text of a bill is crafted and finalized. There is no committee vote that decides whether to recommend the bill to the entire legislative body.

Some of this happens in Sedgwick County, of course, but mostly behind the scenes. There is the county staff meeting Tuesday morning, when the commissioners meet with staff in an informal setting. While this meeting is open to the public, there is rarely news coverage. (Hint to county staff: These meetings could easily be broadcast and archived on the internet without much cost or effort.)

In a legislature, when a bill is considered by the entire body, there is usually an amendment process. They may be many amendments that require time to debate and consider. This process was mentioned by two commission members who have served in the Kansas legislature.

But it seems a majority of Sedgwick County Commission members don’t care for this process.

I understand why some commissioners wanted to end debate. Sometimes amendments to legislation create a moment where legislators have to cast a vote on an issue, often a finely-grained issue. Sometimes that vote is used as a campaign issue in future elections. Those votes may appear in compilations of legislative activity that reveal how legislators vote.

But amendments and debate are part of the legislative process. Commissioner Howell had several amendments that he had prepared in advance. They were not off-the-cuff, spur-of-the-moment ideas. They were crafted to attempt to find a compromise that a majority of commissioners could accept.

But a majority of Sedgwick County Commission members didn’t want that.

Perhaps some commissioners where concerned about the meeting becoming lengthy. We see that from Wichita City Council members. They’re paid a part-time salary, so maybe there’s merit to their carping about long meetings.

But Howell’s amendments took just a few minutes each to consider. And — this is highly relevant — the members of the Sedgwick County Commission are paid a handsome full-time salary. They should not object to the meeting lasting all day, if that’s what it takes to serve the citizens. And citizens were not well-served by the commission’s decision to silence one of its members.

Intrust Bank Arena loss for 2015 is $4.1 million

The depreciation expense of Intrust Bank Arena in downtown Wichita recognizes and accounts for the sacrifices of the people of Sedgwick County and its visitors to pay for the arena.

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 hides the true economics of the arena. What’s missing is depreciation expense.

There hasn’t been much talk of the arena’s finances this year. But in February 2015 the Wichita Eagle reported: “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.

Payments by Intrust Bank Arena to Sedgwick County, tableIn 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.”

I didn’t notice the Eagle opinion page editorializing this year on the release of the arena’s profitability figures. So here’s an example of incomplete editorializing from Rhonda Holman, who opined “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.” (Earlier reporting on this topic in the Eagle in 2013 did not mention depreciation expense, either.)

All of these examples are deficient in some way, and contribute only confusion to the search for truthful accounting of the arena’s finances. As shown below, recognizing depreciation expense is vital to understanding profit or loss, and the “net income” referred to above doesn’t include this. In fact, the “net income” cited above isn’t anything that is recognized by standard accounting principles.

The problem with the reporting of Intrust Bank Arena profits

There are at least two ways of looking at the finance of the arena. Most attention is given to the “profit” (or loss) earned by the arena for the county according to an operating 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 2105, the accounting method used in this agreement produced a profit of $1,150,206, to be split (not equally) between SMG and the county. The county’s share was $375,103.

While described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America.”2

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 2015 Comprehensive Annual Financial Report for Sedgwick County.3 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 $4.1 million. The loss can be attributed to $4.4 million in depreciation expense.

Financial statements in the same document show that $4,443,603 was charged for depreciation in 2015, bringing accumulated depreciation to a total of $30,791,307.

Depreciation expense is not something that is paid out in cash. Sedgwick County didn’t write a check for $4,443,603 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 public leaders recognize this. In years past, Commissioner Dave Unruh made remarks that show the severe misunderstanding that he and almost everyone labor under regarding the nature of the spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”

Earlier in this article we saw examples of the Sedgwick County Assistant Manager, the Intrust Bank Arena manager, and several Wichita Eagle writers making the same mistake.

Intrust Bank Arena commemorative monument
Intrust Bank Arena commemorative monument
The contention — witting or not — of all these people 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 fact that can’t be ignored — except by politicians, apparently. The Wichita Eagle aids in promoting this deception.

We see our governmental and civic leaders telling us that we must “run government like a business.” Without frank and realistic discussion of numbers like these and the economic facts they represent, we make decisions based on incomplete and false information.


Notes

  1. Management Agreement between Sedgwick County and SMG. August 1, 2007. Available here.
  2. The Operations of INTRUST Bank Arena, as Managed by SMG. December 31, 2015. Available here.
  3. Sedgwick County. Comprehensive Annual Financial Report of the County of Sedgwick, Kansas for the Year ended December 31, 2015. Available here.

Wichita Chamber speaks on county spending and taxes

The Wichita Metro Chamber of Commerce urges spending over fiscally sound policies and tax restraint in Sedgwick County.

Today the Wichita Metro Chamber of Commerce issued a “key vote” alert. This procedure, used by political groups of all persuasions, alerts elected officials that the Chamber prefers a certain outcome on an issue. Those who vote in harmony with the Chamber are likely to receive support in their next election, while the noncompliant are implicitly threatened with opponents the Chamber will support.

Here’s what the Chamber sent to commissioners:

From: Barby Jobe
Sent: Tuesday, August 11, 2015 2:47 PM

TO: SEDGWICK COUNTY BOARD OF COUNTY COMMISSIONERS

FROM: WALTER BERRY, Vice Chair, Wichita Metro Chamber Government Relations Committee

RE: KEY VOTE ALERT

While we have not recently had many “key votes” at the local level, the Wichita Metro Chamber would like to alert you that we will be key voting the 2016 Budget.

The Chamber would like to encourage the Commission to consider a compromise by leaving the property tax rate as it is currently and reducing the amount of cash-funded roads thus allowing a reallocation of funds for economic development and education, culture and recreation, city partnerships, and health and human services.

Thank you for your consideration.

Wichita Pavement Condition Index, from the city's 2012 Performance Measure Report
Wichita Pavement Condition Index, from the city’s 2012 Performance Measure Report
It’s unclear precisely what the Wichita Chamber is asking commissioners to do. It seems likely the Chamber is asking for support of “Plan C.” That is the plan drafted by commissioners Tim Norton and Dave Unruh, which proposes deferring road maintenance in order to free funds for current spending. That plan sets the county on the course chosen by the city of Wichita some years ago. That is, defer maintenance on streets and other infrastructure to support current spending. That policy lead to declining quality of streets and a large backlog of other maintenance, with a recent report from the city finding that the “cost to bring existing deficient infrastructure up to standards” is an additional $45 to $55 million per year.

This deferral of maintenance needs is a form of deficit spending. It’s curious that a purportedly conservative organization like the Wichita Chamber of Commerce would support that.

Well, it’s not really surprising. The Wichita Chamber has long advocated for more taxation and spending, taking the lead in promoting the one cent per dollar sales tax proposal in Wichita last year. The Chamber has supported big-spending Republicans over fiscal conservatives for office at several levels.

Your chamber of commerce radio buttonsIn Wichita, and across the country, local chambers of commerce support crony capitalism instead of pro-growth policies that allow free enterprise and genuine capitalism to flourish.

That may be surprising to read. Most people probably think that local chambers of commerce — since their membership is mostly business firms — support pro-growth policies that embrace limited government and free markets. But that’s usually not the case. It’s certainly is not the case in Wichita, where the Chamber supports higher taxes, more government spending, more business welfare, more government planning and control, more cronyism — and less economic freedom. The predictable result is less prosperity, which has been the case in Wichita under the leadership of the Wichita Chamber, its policies, and the politicians and bureaucrats it supports.

Here, in an excerpt from his article “Tax Chambers” economist Stephen Moore — formerly of the Wall Street Journal and now with Heritage Foundation — explains the decline of the local chamber of commerce:

The Chamber of Commerce, long a supporter of limited government and low taxes, was part of the coalition backing the Reagan revolution in the 1980s. On the national level, the organization still follows a pro-growth agenda — but thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government.

In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper. Journalist Tim Carney agrees: All too often, he notes in his recent book, “Rip-Off,” “state and local chambers have become corrupted by the lure of big dollar corporate welfare schemes.”

In the states, chambers have come to believe their primary function is to secure tax financing for sports stadiums, convention centers, high-tech research institutes and transit boondoggles. Some local chambers have reportedly asked local utilities, school administrators and even politicians to join; others have opened membership to arts councils, museums, civic associations and other “tax eater” entities.

“I used to think that public employee unions like the NEA were the main enemy in the struggle for limited government, competition and private sector solutions,” says Mr. Caldera of the Independence Institute. “I was wrong. Our biggest adversary is the special interest business cartel that labels itself ‘the business community’ and its political machine run by chambers and other industry associations.”

From Stephen Moore in the article “Tax Chambers” published in The Wall Street Journal February 10, 2007. The complete article is here.

Sedgwick County WATC funding trajectory following manager’s recommendations

Sedgwick County taxpayers have been generous with funding for Wichita Area Technical College, and the former county manager has recommended reducing its funding.

During the July 16, 2014 meeting of the Sedgwick County Commission, county manager Bill Buchanan presented the recommended budget for 2015. It included a cut in funding for Wichita Area Technical College in the amount of $150,000. In response to a question, Buchanan told the commissioners:

“The new president has been assertive and aggressive in trying to deal with their financial issues. They have, he has turned that financial, that institution around financially. They are in pretty healthy shape. They have a fund balance that’s relatively strong, and it’s in my opinion that our subsidy, although it was critical in the beginning, is less critical in their operations now, and perhaps it would be time for us, when we face our own fiscal issues, to reduce their funding so we can address some of ours.”

Under the leadership of Chair Dave Unruh, this reduction in funding was approved.

At the January 7, 2015 meeting of the commission, again under the leadership of Unruh, the commission heard an off-agenda item to restore $50,000 of the funding for 2015, making the cut $100,000. That item passed. Being an off-agenda item, there is little or no public notice. Commissioner Karl Peterjohn noted this in his remarks: “I frankly would feel much more comfortable if we postponed this issue until we could get it published in the paper and have at least whatever public attention that that would generate provided, as opposed to taking another Off Agenda item that’s going to increase county spending.”

In support of Peterjohn’s motion to delay the decision for a week, Commissioner Richard Ranzau expressed concern over the lack of financial information made available to commissioners. He also repeated the manager’s recommendation that WATC needs less county funding: “Well, I’d like to have more financial information. It’s my understanding that since the state has increased funding for Vocational Ed, they’re doing very well, their reserves increased significantly, and that’s why, I mean, I was told the reason we could reduce it $150,000 was because they were doing so well. I support what they’re doing out there, but if they’ve had an influx of money from the state, a result of Vocational Ed legislation then I think it’s appropriate to adjust our spending, and I’m not prepared to increase it by $50,000 without more financial information, and that’s why I support Commissioner Peterjohn’s motion to postpone this a week so we can get more information and make a more educated decision on this. There is really no reason for hurry through this in my estimation.”

In summary, the Sedgwick County manager recommended that commissioners reduce funding to WATC, as its need for county funding has declined. Under commission chair Unruh, the commission did so, in the net amount of $100,000. The same amount is proposed for cuts this year. In light of this, the criticism of WATC beneficiaries like Spirit Aerosystems is unfounded.

By the way, the commission has been criticized for considering off-agenda items since Ranzau became chair in January, with the Wichita Eagle editorial board describing one off-agenda vote as “abrupt.” In another op-ed, Rhonda Holman complained that “The move came in an off-agenda item, with little opportunity for GWEDC and the business community to argue against it.”

Whether off-agenda items are good or bad public policy seems to depend on the whim of the Eagle editorial board.

Sedgwick County spending beneficiaries overwhelm others

That so many speakers at a public hearing were in favor of government spending is not surprising.

In a letter to the editor of the Wichita Eagle the writer stated “But apparently few of them felt strongly enough to come to the commission hearing and express their support of budget cuts.” He was referring to the public hearing on Wednesday July 29, when some 50 people spoke, and just three supported cuts.

This lopsided ratio is not surprising. It’s an example of the well-known phenomenon of concentrated benefits and dispersed (or diffuse) costs. Explained in this video, it observes that for most government spending programs, the benefits are showered on a few very visible recipients who benefit greatly. There were 47 of these speaking at last week’s public hearing.

But the costs of these spending programs are spread across everyone, or at least a large group. For them, the cost is small. In fact, politicians use this argument in favor of their spending programs. Dave Unruh observed that the proposed county property tax cuts amount to savings of $1.37 per year for a $100,000 house. His arithmetic is correct, and so is his understanding of human nature. Most people look at the small cost of any single government spending program and realize it’s not worth much personal effort to save $1.37 (or whatever) per year.

Since the costs of each spending program is small for any single person, not many get worked up and take action. That’s why only three of 50 speakers opposed the spending programs. Politicians and beneficiaries of spending programs rely on this imbalance of motives.

Not often mentioned is that most of the organizations seeking county funding are charities. Anyone may make contributions directly to them. Some people have testified that they don’t need a cut in taxes, or that they would be willing to be taxed more so that these organizations could have more funding. Perhaps these people don’t realize that it is within their power to make contributions to these charities at any time.

It seems we have forgotten that charity is a voluntary act, and that government taxation and spending is not charitable. This is evidence of further drift from a civil society where things like zoos and medical care for the poor are handled on a voluntary and cooperative basis. Instead, we fight.

Intrust Bank Arena loss for 2014 is $5 million

The depreciation expense of Intrust Bank Arena in downtown Wichita recognizes and accounts for the sacrifices of the people of Sedgwick County and its visitors to pay for the arena. But no one wants to talk about this.

The true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters promote a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and hides the true economics of the arena. What’s missing is depreciation expense.

In February the Wichita Eagle reported: “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. Strike one.

Last December, 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.” Strike two.

I didn’t notice the Eagle opinion page editorializing this year on the release of the arena’s profitability figures. So here’s an example of incomplete editorializing from Rhonda Holman, who opined “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.” (Earlier reporting on this topic in the Eagle in 2013 did not mention depreciation expense, either.) Strike three in the search for truthful accounting of the arena’s finances.

The problem with the reporting of Intrust Bank Arena profits

There are at least two ways of looking at the finance of the arena. Most attention is given to the “profit” (or loss) earned by the arena for the county according to an operating and management agreement between the county and SMG, a company that operates the arena.

This agreement specifies a revenue sharing mechanism between the county and SMG. For 2103, the accounting method used in this agreement produced a profit of $705,678, to be split (not equally) between SMG and the county. The county’s share, as Holman touted in her Eagle op-ed, was $255,678. (Presumably that’s after deducting the cost of producing an oversize check for the television cameras.)

For 2014, the arena’s profit was $122,853. All that goes to SMG, based on the revenue-sharing agreement.

The Operations of Intrust Bank ArenaWhile described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America.”

That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.

A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2014 Comprehensive Annual Financial Report for Sedgwick County. This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially 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 had an operating loss of $5.0 million. The loss can be attributed to $5.2 million in depreciation expense.

Financial statements in the same document show that $5,157,424 was charged for depreciation in 2014, bringing accumulated depreciation to a total of $26,347,705.

Depreciation expense is not something that is paid out in cash. Sedgwick County didn’t write a check for $5,157,424 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 public leaders recognize this. In years past, Commissioner Dave Unruh made remarks that show the severe misunderstanding that he and almost everyone labor under regarding the nature of the spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”

Earlier in this article we saw examples of the Sedgwick County Assistant Manager, the Intrust Bank Arena manager, and several Wichita Eagle writers making the same mistake.

Intrust Bank Arena commemorative monument
Intrust Bank Arena commemorative monument
The contention — witting or not — of all these people 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 fact that can’t be ignored — except by politicians, apparently. The Wichita Eagle aids in promoting this deception.

We see our governmental and civic leaders telling us that we must “run government like a business.” Without frank and realistic discussion of numbers like these and the economic facts they represent, we make decisions based on incomplete and false information.

A Wichita Shocker, redux

Based on events in Wichita, the Wall Street Journal wrote “What Americans seem to want most from government these days is equal treatment. They increasingly realize that powerful government nearly always helps the powerful …” But Wichita’s elites don’t seem to understand this.

A Wichita ShockerThree years ago from today the Wall Street Journal noted something it thought remarkable: a “voter revolt” in Wichita. Citizens overturned a decision by the Wichita City Council regarding an economic development incentive awarded to a downtown hotel. It was the ninth layer of subsidy for the hotel, and because of our laws, it was the only subsidy that citizens could contest through a referendum process.

In its op-ed, the Journal wrote:

The elites are stunned, but they shouldn’t be. The core issue is fairness — and not of the soak-the-rich kind that President Obama practices. One of the leaders of the opposition, Derrick Sontag, director of Americans for Prosperity in Kansas, says that what infuriated voters was the veneer of “political cronyism.”

What Americans seem to want most from government these days is equal treatment. They increasingly realize that powerful government nearly always helps the powerful, whether the beneficiaries are a union that can carve a sweet deal as part of an auto bailout or corporations that can hire lobbyists to write a tax loophole.

The “elites” referred to include the Wichita Metro Chamber of Commerce, the political class, and the city newspaper. Since then, the influence of these elites has declined. Last year all three campaigned for a sales tax increase in Wichita, but voters rejected it by a large margin. It seems that voters are increasingly aware of the cronyism of the elites and the harm it causes the Wichita-area economy.

Last year as part of the campaign for the higher sales tax the Wichita Chamber admitted that Wichita lags in job creation. The other elites agreed. But none took responsibility for having managed the Wichita economy into the dumpster. Even today the local economic development agency — which is a subsidiary of the Wichita Chamber — seeks to shift blame instead of realizing the need for reform. The city council still layers on the levels of subsidy for its cronies.

Following, from March 2012:

A Wichita shocker

“Local politicians like to get in bed with local business, and taxpayers are usually the losers. So three cheers for a voter revolt in Wichita, Kansas last week that shows such sweetheart deals can be defeated.” So starts today’s Wall Street Journal Review & Outlook editorial (subscription required), taking notice of the special election last week in Wichita.

The editorial page of the Wall Street Journal is one of the most prominent voices for free markets and limited government in America. Over and over Journal editors expose crony capitalism and corporate welfare schemes, and they waste few words in condemning these harmful practices.

The three Republican members of the Wichita City Council who consider themselves fiscal conservatives but nonetheless voted for the corporate welfare that voters rejected — Pete Meitzner (district 2, east Wichita), James Clendenin (district 3, southeast and south Wichita), and Jeff Longwell (district 5, west and northwest Wichita) — need to consider this a wake up call. These members, it should be noted, routinely vote in concert with the Democrats and liberals on the council.

For good measure, we should note that Sedgwick County Commission Republicans Dave Unruh and Jim Skelton routinely — but not always — vote for these crony capitalist measures.

The Wichita business community, headed by the Wichita Metro Chamber of Commerce endorsed this measure, too.

Hopefully this election will convince Wichita’s political and bureaucratic leaders that our economic development policies are not working. Combined with the startling findings by a Tax Foundation and KMPG study that finds Kansas lags near the bottom of the states in tax costs to business, the need for reform of our spending and taxing practices couldn’t be more evident. It is now up to our leaders to find within themselves the capability to change — or we all shall suffer.

WichitaLiberty.TV: Government accounting, Government ownership of infrastructure, and Wichita commercial property taxes

In this episode of WichitaLiberty.TV: Government leaders tell us they want to run government like a business. But does government actually do this, even when accounting for its money? Then, is it best for government to own all the infrastructure? Finally, taxes on Wichita commercial property are high, compared to the rest of the nation. Episode 46, broadcast June 8, 2014. View below, or click here to view at YouTube.

Intrust Bank Arena: Not accounted for like a business

Proper attention given to the depreciation expense of Intrust Bank Arena in downtown Wichita recognizes and accounts for the sacrifices of the people of Sedgwick County and its visitors to pay for the arena. It’s a business-like way of accounting, but a well-hidden secret.

Sedgwick County Working for YouThe true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters promote a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and hides the true economics of the arena. What’s missing is depreciation expense.

An example of the incomplete editorializing comes from Rhonda Holman of the Wichita Eagle, who opined “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.”

Earlier reporting on this topic in the Eagle did not mention depreciation expense, either.

There are at least two ways of looking at the finance of the arena. Most attention is given to the “profit” (or loss) earned by the arena for the county according to an operating and management agreement between the county and SMG, a company that operates the arena.

This agreement specifies a revenue sharing mechanism between the county and SMG. For 2103, the accounting method used in this agreement produced a profit of $705,678, to be split (not equally) between SMG and the county. The county’s share, as Holman touted, was $255,678. Presumably that’s after deducting the cost of producing an oversize check for the television cameras.

The Operations of Intrust Bank ArenaWhile described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America.”

That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.

A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2013 Comprehensive Annual Financial Report for Sedgwick County. This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially at Sedgwick County in 2013. In that respect, it is a report card of our ability to manage our financial resources.”

Regarding the arena, the CAFR states:

The Arena Fund represents the activity of the INTRUST Bank Arena that opened on January 9, 2010. The facility is operated by a private company; the county incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any. The Arena had an operating loss of $4.7 million. The loss can be attributed to $5.3 million in depreciation expense.

Financial statements in the same document show that $5,295,414 was charged for depreciation in 2013, bringing accumulated depreciation to a total of $21,190,280.

Depreciation expense is not something that is paid out in cash. Sedgwick County didn’t write a check for $5,295,414 in depreciation expense. Instead, depreciation accounting provides a way to recognize and account for the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.

But some don’t recognize this. In years past, Commissioner Dave Unruh made remarks that show the severe misunderstanding that he and almost everyone labor under regarding the nature of the spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”

Intrust Bank Arena commemorative monument
Intrust Bank Arena commemorative monument
The contention of Unruh and other arena boosters such as the Wichita Eagle editorial board is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) on the arena is merely a historical artifact, something that happened in the past, something that has no bearing today. There is no opportunity cost, according to his view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds.

Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct in that depreciation expense is not a cash expense that affects cash flow, it is an economic fact that can’t be ignored — except by politicians, apparently.

We see our governmental and civic leaders telling us that we must “run government like a business.” Without frank and realistic discussion of numbers like these and the economic facts they represent, we make decisions based on incomplete and false information.

Wichita not good for small business

The Wichita Business Journal reports today:

When it comes to having good conditions to support small businesses, well, Wichita isn’t exactly at the top of the list, according to a new ranking from The Business Journals.

In fact, the Wichita metro area’s small-business vitality score is nearly at the bottom — 99th out of the 101 U.S. metro areas included in the study. (Wichita near bottom for small-business vitality score, April 2, 2014)

Many in Wichita don’t want to recognize and confront the bad news about the performance of the Wichita-area economy. Last year, when presenting its annual report to local governmental bodies, the leaders of Visioneering Wichita would not present benchmark data to elected officials.

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So what is the record of the Wichita metropolitan area regarding job creation, that seeming to be the most popular statistic our leaders cite and promote? I’ve prepared statistics from the Bureau of Labor Statistics, U.S. Department of Labor for Wichita and a broad group of peer cities. I included our Visioneering peer cities, cities that Visioneers traveled to on official visits, and a few others. The result, shown nearby, is not pretty. (Click on charts for larger versions, or click here to use the interactive visualization)

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If we look at job creation starting in 1990, Wichita lags behind our Visioneering peers, but not behind all the peer cities that I selected. Wichita does better than Springfield, Illinois, for example. I chose to include that as a peer metropolitan area because that’s the immediate past city that Gary Plummer worked in. He was president of that city’s Chamber of Commerce, and is now president of the Wichita Chamber. Note the position of Springfield: Last place.

In next-to-last place we see Wichita Falls, Texas. I chose to include it because it is the immediate past home of Tim Chase. He was the head of Wichita Falls Economic Development Corporation. He’s now president of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development for the Wichita area.

In second-to-last place we see Pittsburgh, which I added because Visioneering leaders recently made a visit there.

Then, we come to Wichita.

If we look at job creation since 2007 we find Wichita in a common position: Last place in job creation, and by a wide margin except for two cities. One is Wichita Falls, where our present GWEDC president recently worked. The other city that barely out-performs Wichita is Chattanooga, which I included because Visioneering civic leaders recently traveled there to learn from that city.

Over the decades in which Wichita has performed poorly, there have been a few common threads. Carl Brewer has been council member or mayor since 2001. Economic development director Allen Bell has been working for the city since 1992. City Attorney Gary Rebenstorf has served for decades. At Sedgwick County, manager William Buchanan has held that position for more than two decades. On the Sedgwick County Commission, Dave Unruh has been in office since 2003, and Tim Norton since 2001. It is these officials who have presided over the dismal record of Wichita.

Wichita City Manager Robert Layton has had less time to influence the course of economic development in Wichita. But he’s becoming part of the legacy of Wichita’s efforts in economic development.

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These leaders often complain that Wichita does not have enough “tools in the toolbox” to compete with other cities in economic development. Wichita does, however, have and use incentives. The State of Kansas regularly offers incentives so generous that Kansas business leaders told the governor that they value these incentives more than they would value elimination of the state corporate income tax.

Incentives: We have them. They haven’t worked for us.

It is nearly certain that this year Wichitans will be asked to approve a higher sales tax in order to pay for many things, including the more aggressive approach to job creation that Brewer mentioned. Based on the track record of our elected officials and bureaucrats, we need to do this: Before approving the tax and expenditures, Wichitans need to take a long look at the people who have been in charge, and ask what will be different going forward.

Wichita Chamber of Commerce: Why these panelists?

wichita-chamber-commerce-2013-11-05Last week the Wichita Metro Chamber of Commerce conducted a panel discussion about economic development and job creation in Wichita. The experts selected as panelists tells us a lot about why the Wichita economy has suffered.

In case anyone is not aware of the performance of the Wichita-area economy, the Wichita Eagle reported “Exhibit No. 1 in their presentation was a Chamber of Commerce chart showing that, five years after the recession ended, Wichita had regained few, if any, jobs from the depths of the economic downturn — while other cities across the region have rebounded strongly.” (Wichita must step up efforts to attract jobs, civic leaders say, Thursday, February 6, 2014)

Wichita Chamber presentation. Click for larger version.
Wichita Chamber presentation. Click for larger version.

On the same event, the Wichita Business Journal reported “But the luncheon opened with a somber look at Wichita’s ranking among peer cities in the Midwest region. The chart shows Wichita area employment growth since January 2005 well below the other cities, barely above its 2005 employment.” (Chamber luncheon speakers: Wichita needs to compete better for jobs)

The news about the poor performance of Wichita in this regard is no surprise to readers of this site, although I’m not sure that those in charge, such as Wichita Mayor Carl Brewer, believe the numbers. Brewer, along with Dave Unruh and Chamber president Wayne Chambers were the three panelists on Wichita economic development.

What is surprising is that Brewer and Unruh were selected as experts in this field, given the city’s poor performance and the tenure of these two leaders. Brewer has been mayor for nearly seven years, and has served on the city council 2001. Unruh has been in office since 2003, and has been chair of the commission several times, as he is currently.

Brewer — after 13 years holding city office — had this to say, according to the Eagle: “Brewer said the Wichita City Council will look at the results of a recent community engagement survey to see how high a priority to place on economic development.”

Imagine that. Our city’s longtime leader, as he enters the last year of his mayorality: Now he’s going to get serious about economic development, and will do so by relying on a citizen survey.

To use interactive visualizations that explore the Wichita economy, see Wichita’s growth in gross domestic product and For Wichita’s economic development machinery, failure.