The City of Wichita says it retains final approval on the redesign of Naftzger Park, but a contract says otherwise.
As part of the proposed redesign of Naftzger Park in downtown Wichita, an architectural firm has been engaged, and a contract agreed to. I’ve made the document available through Google Drive here.
In responding to my request for the contract, the city included this information:
The Naftzger Park design contract you requested is between SWA Balsley and TGC Development Group. SWA has provided a copy of the draft agreement. The City has coordinated with TGC in this effort to ensure that the selection process followed City procedures. The City Council has taken action to select SWA as the design team and did accept the design funding proposal of SWA Balsley, but is not a party to the design contract. The City is utilizing this collaborative approach to take advantage of the experience and expertise in project management of TGC Development in this unique project. Any final Naftzger Park design approval is retained by the Parks Board and the City of Wichita.1 (emphasis added)]
As stated, and according to the language of the contract, the parties to the contract are SWA/Balsley Landscape Architects, P.C. (“SWA/Balsley”) and TGC Development Group, which is referred to as the “Client.” The City of Wichita is not the Client; that party is a private business firm. And not just any private firm, but one that owns property abutting Naftzger Park and is clearly looking to rebuild the park according to its needs and profitability, not what is good for the city at large.
As to the city’s contention that final approval is retained by it alone, the contract holds language like this:
“Upon the Client’s authorization to commence design development …”
“Upon the Client’s approval of the design development plans and preliminary cost estimate …”
“SWA/Balsley shall prepare and process change orders only with prior approval of the Client.”
Example from the contract. Click for larger.(The document is covered with a large watermark that obscures parts of its text. As the document is encrypted, there is no way to remove the watermark without the password, as far as I know.)
Remember, the city is not the Client. TGC Development is the Client.
Here is a paragraph near the end of the contract:
“As material inducement to SWA/Balsley to enter into this agreement, Client represents it warrants that it has full authority to bind the City to the terms of this Agreement, and that the City will assume full responsibility for payment.” (emphasis added)
There’s a discrepancy here. The city says final approval rests with it alone, but TGC Development has agreed to a contract which states it can bind the city to an agreement.
By the way, if you thought the Naftzger Park redesign was a $1.5 million project, think again, as this language from the contract shows:
“Based upon our understanding of the project, the park design should encompass the vision as described in the RFQ and be planned with phased implementation. Conceptual and Schematic Design phases were based on a complete vision of an estimated $3,000,000 budget. Design Development, Construction Documentation, and Construction Observation, which are to be completed under Phase One, are established at $1,500,000. The fee quoted in this proposal is based upon this present understanding and these budgetary figures.”
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Notes
Correspondence from Lauragail Locke of the Wichita City Manager’s Office, August 3, 2017. ↩
Wichita doesn’t need to ruin a park for economic development, as there are other areas that would work and need development.
One of the reasons for the redesign of Naftzger Park in downtown Wichita is to increase economic development. A city council agenda held, “These recommendations include opening up the park to provide for increased walking and public activity as well as to encourage development adjacent to the park.” 1
Other city documents say the redesign of the small downtown Wichita park is to, “create a continuous flex space for multi-use; i.e. Tai Chai, as well as other passive use activities including but not limited to weddings, concerts, performances, films, special celebrations and parties as well as quiet contemplation.” 2
In other documents city officials have promoted the need for gathering space before and after events at Intrust Bank Arena.
All this is fine. But current plans call for the destruction of an existing park and its transformation into this new design.
But there’s no need to destroy an existing park in order to meet the goals of the city. There is a lot of vacant and underutilized land immediately south and west of the arena. Any of this could be transformed to what the city wants. Development of these areas would possibly help fulfill the promise of the arena as a driver for economic development and growth.
Today, 12 years after the identification of the arena’s site and seven years after its opening, there is little activity around the arena to its west and south. Five years ago the Wichita Eagle noted the lack of growth in the area.
“Ten years ago, Elizabeth Stevenson looked out at the neighborhood where a downtown arena would soon be built and told an Eagle reporter that one day it could be the ‘Paris of the Midwest.’ What she and many others envisioned was a pedestrian and bike-friendly neighborhood of quaint shops, chic eateries and an active arts district, supported by tens of thousands of visitors who would be coming downtown for sporting events and concerts. It hasn’t exactly turned out that way. Today, five years after the opening of the Intrust Bank Arena, most of the immediate neighborhood looks much like it did in 2004 when Stevenson was interviewed in The Eagle. With the exception of a small artists’ colony along Commerce Street, it’s still the same mix of light industrial businesses interspersed with numerous boarded-up buildings and vacant lots, dotted with ‘for sale’ and ‘for lease’ signs.” 3
Since then, not much has changed. The area surrounding the arena is largely vacant. Except for Commerce Street, that is, and the businesses located there don’t want to pay their share of property taxes.4
On the other hand, the area around Naftzger Park is developing. The city points to Old Town as a success, and now promotes the “Douglas Corridor” as an area where city policies have produced growth, with more yet to come as Cargill and a call center move to a location near Naftzger Park.
But the areas on the other side of the arena are not growing. Doing something to jump-start development in that stagnant area could help downtown growth. Paying attention to that area would fulfill past promises and projections, and increase the credibility of Wichita’s leaders.
Nearby are photographs of the area surrounding the arena to the east and west. Click photos for larger versions.
Intrust Bank Arena and environs, with areas for development outlined and numbered. Image courtesy Google.In area 1, across Emporia Street from the arena, a former used car lot is unused. A vacant lot is to its immediate west.Area 3 is the block diagonally south and west from the arena. It is vacant land except for parking and a work-release facility.More of area 3.Area 4 is directly across Waterman Street to the south of the arena. It holds a parking lot along with abandoned and underutilized buildings.Abandoned buildings on St. Francis Street, within pitching distance of the arena. Could this area be used for gatherings?
What was said
Following, a few quotes from civic leaders in 2005.
“On the brink of spending $55 million to renovate the Kansas Coliseum, the community saw the wisdom of investing that kind of money instead in downtown Wichita, where it could spur development, lure conventions and enhance Old Town and the planned WaterWalk development. The action on behalf of an arena has offered the strongest signal in years that Wichita, booming fringes and all, still wants a vibrant, functional downtown. 5
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Imagine sports fans and concertgoers flocking to restaurants and shops in a lively, distinctive district surrounding Wichita’s new downtown entertainment arena. Can the 15,000-seat venue be the Pied Piper of economic development? City officials hope so.
“It will have a profound change,” Wichita Mayor Carlos Mayans said. He envisions a modern, sophisticated district, home to a four-star hotel, apartment buildings, high-end retailers, a Cajun restaurant – maybe a Hard Rock Cafe. “The things happening downtown are going to change downtown Wichita for the 21st century,” he said.
Officials view the arena as another opportunity to coax more life into downtown. The city is hunting for a consultant to help it cash in on development opportunities surrounding the arena. 6
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While Sedgwick County lays the groundwork for its 15,000-seat downtown arena, the city of Wichita is busy trying to plan for everything that will go around it. The city wants the advice and expertise of a consultant to help it develop a lively, distinctive district to jump-start — and cash in on — downtown redevelopment. 7
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The arena will cause spillover development, but the city must carefully set the conditions to foster economic development, said Dave Knopick, an urban planner with Gould Evans Associates, the consultants hired to study the arena area. This includes attractive streets and public features, adequate parking, good traffic flow, zoning to bring in wanted businesses, and even deals with developers to bring in new projects. “These are once-in-a-lifetime events that have a huge impact, so you have to make the right decision to maximize the benefits,” Knopick said. …
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The arena is a key part of the downtown revival, but it’s just one piece. “It’s a redeveloping area, but those changes may take place over 10 or 15 years,” Knopick said. “It won’t all just happen because the arena was built.” 8
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The most exciting development: a new downtown arena. Whatever the final site selection (we vote for the east site), the reality is sinking in that this major community project will have a heavyweight impact on the core area. The naysayers said none of this could happen — in fact, they said the same thing about Old Town. It’s happening.
Things change — and sometimes change is disruptive and hard to accept. But Wichitans should be excited by what’s happening downtown.
I would like to congratulate the city leaders and the public for their insight and willingness to see the impact that the development of downtown will have for the citizens of Wichita and all of south-central Kansas. We only stand to benefit from this much-needed injection into the economy.
It is about re-energizing this community, spurring economic development, creating jobs, quality of life, encouraging tourism from around the region, and bringing money into our community.
The WaterWalk development and the downtown arena are only the beginning of the potential for downtown to flourish and continue to fuel other economic development. Wichita has an opportunity to become a viable destination stop. And these projects can help support many of the other amenities already available in the city, such as the museums along the river, the ice center, Old Town and so many other businesses and attractions. 10 Richard L. Taylor of Wichita is business manager for the Building and Construction Trades Council of Central and Western Kansas.
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Notes
Wichita city council agenda packet, July 18, 2017. Item IV-3. ↩
Holman, Rhonda. AT LAST – ARENA COMING SOON TO DOWNTOWN WICHITA.Wichita Eagle, March 23, 2005. ↩
Buselt, Lori O’Toole. GROUNDS FOR CHANGE — WILL ARENA RENEW FALLOW DOWNTOWN?Wichita Eagle, May 1, 2005. ↩
Buselt, Lori O’Toole. CITY TRIES TO PLAN ARENA’S DISTRICT – — OFFICIALS ARE CONSIDERING HIRING A CONSULTANT TO HELP DEVELOP THE AREA AROUND THE NEW DOWNTOWN ARENA.Wichita Eagle, June 20, 2005. ↩
Voorhis, Dan. TUG-OF-WAR FOR ARENA — PLACEMENT WILL FAVOR OLD TOWN OR WATERWALK.Wichita Eagle, September 18, 2005. ↩
Scholfield, Randy. REBIRTH — DOWNTOWN IS PLACE TO BE.Wichita Eagle, November 7, 2005. ↩
Taylor, Richard L. DOWNTOWN DEVELOPMENT BENEFITS ALL.Wichita Eagle, November 15, 2005. ↩
In Wichita, a space for outdoor concerts may be created across the street from where amplified concerts are banned.
Amplified music is banned in Gallery Alley, but concerts and parties are proposed in Naftzger Park.One of the City of Wichita’s stated purposes for the redesign of Naftzger Park in downtown Wichita is to, “create a continuous flex space for multi-use; i.e. Tai Chai, as well as other passive use activities including but not limited to weddings, concerts, performances, films, special celebrations and parties as well as quiet contemplation.” 1
There may be a problem, however. Directly across the street from Naftzger Park lies Gallery Alley. This is a new development whereby an alley was converted to a space for events, like concerts. Not long after the alley’s first events, the Wichita Eagle reported this:
But it was too much for the neighbors, according to Jason Gregory, executive vice president of Downtown Wichita.
“It’s just the amplified sound — we’re just trying to be respectful to those buildings there, that have a mix of uses,” Gregory said. “There’s residences there, and obviously when you get high-bass subwoofers, you’re basically hearing that through the building.” 2
Now, right across the street from Gallery Alley, directly across St. Francis from residences at the former Eaton Hotel, directly across Douglas from the Zelman Lofts, and catty-corner from the Lofts at St. Francis, the city proposes creating an outdoor space for — get ready: Concerts and parties.
By the way, the proposed use of the parking lot that abuts Naftzger Park is a “high-end mixed-use development” possibly including a hotel. I don’t know if this use is consistent with parties and concerts in its front yard.
The City of Wichita plans subsidized development of a sports facility as an economic driver.
West Bank Redevelopment District. Click for larger.This week the Wichita City Council will consider a project plan for a redevelopment district near Downtown Wichita. It is largely financed by Tax Increment Financing and STAR bonds. Both divert future incremental tax revenue to pay for various things within the district.12
City documents promise this: “The City plans to substantially rehabilitate or replace Lawrence-Dumont Stadium into a multi-sport athletic complex. The TIF project would allow the City to make investments in Lawrence-Dumont Stadium, construct additional parking in the redevelopment district, initiate improvements to the Delano multi-use path and make additional transportation improvements related to the stadium project area. In addition to the stadium work, the City plans to construct, utilizing STAR bond funds, a sports museum, improvements to the west bank of the Arkansas River and construct a pedestrian bridge connecting the stadium area with the Century II block. The TIF project is part of the overall plan to revitalize the stadium area and Delano Neighborhood within the district.”3
We’ve heard things like this before. Each “opportunity” for the public to invest in downtown Wichita is accompanied by grand promises. But actual progress is difficult to achieve, as evidenced by the example of Block One.4
Trends of business activity in downtown Wichita. Click for larger.In fact, change in Downtown Wichita — if we’re measuring the count of business firms, jobs, and payroll — is in the wrong direction, despite large public and private investment. 5
Perhaps more pertinent to a sports facility as an economic growth driver is the Intrust Bank Arena. Five years ago the Wichita Eagle noted the lack of growth in the area. 6 Since then, not much has changed. The area surrounding the arena is largely vacant. Except for Commerce Street, that is, and the businesses located there don’t want to pay their share of property taxes. 7
I’m sure the city will remind us that the arena was a Sedgwick County project, not a City of Wichita project, as if that makes a difference. Also, the poor economic performance cited above is for Downtown Wichita as delineated by zip code 67202, while the proposed stadium project lies just outside that area, as if that makes a difference.
By the way, this STAR bonds district is an expansion of an existing district which contains the WaterWalk development. That development has languished, with acres of land having been available for development for many years. We’ve also found that the city was not holding the WaterWalk developer accountable to the terms of the deal that was agreed upon, to the detriment of Wichita taxpayers. 8
Following, selected articles on the economics of public financing of sports stadiums.
The Economics of Subsidizing Sports Stadiums
Scott A. Wolla, “The Economics of Subsidizing Sports Stadiums,” Page One Economics, May 2017. This is a project of the Federal Reserve Bank of St. Louis. Link.
“Building sports stadiums has an impact on local economies. For that reason, many people support the use of government subsidies to help pay for stadiums. However, economists generally oppose such subsidies. They often stress that estimations of the economic impact of sports stadiums are exaggerated because they fail to recognize opportunity costs. Consumers who spend money on sporting events would likely spend the money on other forms of entertainment, which has a similar economic impact. Rather than subsidizing sports stadiums, governments could finance other projects such as infrastructure or education that have the potential to increase productivity and promote economic growth.”
What economists think about public financing for sports stadiums
Jeff Cockrell, Chicago Booth Review, February 01, 2017. Link.
“But do the economic benefits generated by these facilities — via increased tourism, for example — justify the costs to the public? Chicago Booth’s Initiative on Global Markets put that question to its US Economic Experts Panel. Fifty-seven percent of the panel agreed that the costs to taxpayers are likely to outweigh benefits, while only 2 percent disagreed — though several panelists noted that some contributions of local sports teams are difficult to quantify.”
Publicly Financed Sports Stadiums Are a Game That Taxpayers Lose
Jeffrey Dorfman. Forbes, January 31, 2015. Link.
“Once you look at things this way, you see that stadiums can only justify public financing if they will draw most attendees from a long distance on a regular basis. The Super Bowl does that, but the average city’s football, baseball, hockey, or basketball team does not. Since most events held at a stadium will rely heavily on the local fan base, they will never generate enough tax revenue to pay back taxpayers for the cost of the stadium.”
Sports Facilities and Economic Development
Andrew Zimbalist, Government Finance Review, August 2013. Link.
“This article is meant to emphasize the complexity of the factors that must be evaluated in assessing the economic impact of sports facility construction. While prudent planning and negotiating can improve the chances of minimizing any negative impacts or even of promoting a modest positive impact, the basic experience suggests that a city should not expect that a new arena or stadium by itself will provide a boost to the local economy.
Instead, the city should think of the non-pecuniary benefits involved with a new facility, whether they entail bringing a professional team to town, keeping one from leaving, improving the conveniences and amenities at the facility, or providing an existing team with greater resources for competition. Sports are central to cultural life in the United States (and in much of the world). They represent one of the most cogent ways for residents to feel part of and enjoy belonging to a community. The rest of our lives are increasingly isolated by modern technological gadgetry. Sport teams help provide identity to a community, and it is this psychosocial benefit that should be weighed against the sizeable public investments that sports team owners demand.”
“Ten years ago, Elizabeth Stevenson looked out at the neighborhood where a downtown arena would soon be built and told an Eagle reporter that one day it could be the ‘Paris of the Midwest.’ What she and many others envisioned was a pedestrian and bike-friendly neighborhood of quaint shops, chic eateries and an active arts district, supported by tens of thousands of visitors who would be coming downtown for sporting events and concerts. It hasn’t exactly turned out that way. Today, five years after the opening of the Intrust Bank Arena, most of the immediate neighborhood looks much like it did in 2004 when Stevenson was interviewed in The Eagle. With the exception of a small artists’ colony along Commerce Street, it’s still the same mix of light industrial businesses interspersed with numerous boarded-up buildings and vacant lots, dotted with ‘for sale’ and ‘for lease’ signs.” Lefler, Dion. 5 years after Intrust Bank Arena opens, little surrounding development has followed.Wichita Eagle. December 20, 2014. Available at http://www.kansas.com/news/local/article4743402.html. ↩
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 Eaglereported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time. Neither did the Eagle article.
In December 2014, in a look at the first five years of the arena, its manager told the Wichita Eagle this: “‘We know from a financial standpoint, the building has been successful. Every year, it’s always been in the black, and there are a lot of buildings that don’t have that, so it’s a great achievement,’ said A.J. Boleski, the arena’s general manager.”
The Wichita Eagle opinion page hasn’t been helpful, with Rhonda Holman opining with thoughts like this: “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.”
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 monumentThe 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.
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Notes
Management Agreement between Sedgwick County and SMG. August 1, 2007. Available here. ↩
The Operations of INTRUST Bank Arena, as Managed by SMG. December 31, 2016. Available here. ↩
An information resource regarding the future of Naftzger Park in downtown Wichita.
A possible plan for Naftzger ParkThe City of Wichita is proposing to spend $1,500,000 to transform Naftzger Park from its present form to something else. Here are information resources:
A Facebook group I created to share information. Please join and get involved.
Are the City of Wichita’s projections regarding subsidized development as an economic driver believable?
Map of STAR bond districts. Click for larger.This week the Wichita City Council will consider a project plan for a STAR bonds district near Downtown Wichita. These bonds divert future incremental sales tax revenue to pay for various things within the district.1
City documents promise this: “The City plans to substantially rehabilitate or replace Lawrence Dumont Stadium as a modern multi-sport stadium as part of a larger project to develop the river and stadium areas. … Combined, the museum, pedestrian bridge, waterfront improvements and multi-sport stadium will generate significant new visitor tourism as well as provide signature quality of life amenities for the citizens of Wichita and the region.”2
We’ve heard things like this before. Each “opportunity” for the public to invest in downtown Wichita is accompanied by grand promises. But actual progress is difficult to achieve, as evidenced by the lack of progress in Block One.3
Trends of business activity in downtown Wichita. Click for larger.In fact, change in Downtown Wichita — if we’re measuring the count of business firms, jobs, and payroll — is in the wrong direction, despite public and private investment.4
Perhaps more pertinent to a sports facility as an economic growth driver is the Intrust Bank Arena. Five years ago the Wichita Eagle noted the lack of growth in the area.5 Since then, not much has changed. The area surrounding the arena is largely vacant. Except for Commerce Street, that is, and the businesses located there don’t want to pay their share of property taxes.6
I’m sure the city will remind us that the arena was a Sedgwick County project, not a city project, as if that makes a difference. Also, the poor economic performance cited above is for Downtown Wichita as delineated by zip code 67202, while the proposed STAR bond project lies just outside that area, as if that makes a difference.
By the way, this STAR bonds district is an expansion of an existing district which contains the WaterWalk development. That development has languished, with acres of land having been available for development for many years.
“Ten years ago, Elizabeth Stevenson looked out at the neighborhood where a downtown arena would soon be built and told an Eagle reporter that one day it could be the ‘Paris of the Midwest.’ What she and many others envisioned was a pedestrian and bike-friendly neighborhood of quaint shops, chic eateries and an active arts district, supported by tens of thousands of visitors who would be coming downtown for sporting events and concerts. It hasn’t exactly turned out that way. Today, five years after the opening of the Intrust Bank Arena, most of the immediate neighborhood looks much like it did in 2004 when Stevenson was interviewed in The Eagle. With the exception of a small artists’ colony along Commerce Street, it’s still the same mix of light industrial businesses interspersed with numerous boarded-up buildings and vacant lots, dotted with ‘for sale’ and ‘for lease’ signs.” Lefler, Dion. 5 years after Intrust Bank Arena opens, little surrounding development has followed.Wichita Eagle. December 20, 2014. Available at http://www.kansas.com/news/local/article4743402.html. ↩
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 Eaglereported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time.
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.”
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 monumentThe 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
Management Agreement between Sedgwick County and SMG. August 1, 2007. Available here. ↩
The Operations of INTRUST Bank Arena, as Managed by SMG. December 31, 2015. Available here. ↩
Sedgwick County. Comprehensive Annual Financial Report of the County of Sedgwick, Kansas for the Year ended December 31, 2015. Available here. ↩
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 Eaglereported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time. 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.
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.”
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 monumentThe 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.
In this episode of WichitaLiberty.TV, host Bob Weeks reviews chapter 4 of “Economics in One Lesson,” about how public works mean taxes, and efforts to create jobs through spending on public works do more ham than good, if the public asset is not truly needed. The tax used to build the Instrust Bank Arena in Wichita is analyzed in this light. Then on to chapter 5, “Taxes Discourage Production.” Amanda BillyRock illustrates, and Bob explains that notwithstanding inventions like the powdered orange drink Tang, innovation and progress comes primarily from the private sector, not from government programs. Episode 13, broadcast September 15, 2013. View below, or click here to view at YouTube.
I have often wondered why economists, with these absurdities all around them, so easily adopt the view that men act rationally. This may be because they study an economic system in which the discipline of the market ensures that, in a business setting, decisions are more or less rational. The employee of a corporation who buys something for $10 and sells it for $8 is not likely to do so for long. … A politician who wastes his country’s resources on a grand scale may have a successful career.
— Ronald Coase
At one time it was thought that the Wichita city-owned parking structure in the 400 block of East William Street would house retail shops along the street. But the results should give us reason to be wary of government economic development efforts.
As reported by the Wichita Eagle almost twenty years ago on Wednesday, October 20, 1993:
The council also approved a plan to spend about $76 a square foot to construct roughly 6,000 square feet of retail space on the first floor of the parking garage. The space would lease for an estimated $8.70 a square foot.
Council member Sheldon Kamen questioned that part of the plan. ”I just can’t visualize spending $76 a square foot,” he said. “If I was a developer I wouldn’t spend $76 a square foot for retail space on William street.”
Council member Joan Cole disagreed with Kamen, calling $8.70 a “very good price” that would attract tenants. ”It is my feeling there are small operations that would find this kind of small space very attractive,” she said.
(Adjusted for inflation, these prices would be $122 and $14.)
But it hasn’t happened. As can be seen in this video, a Wichita city government office occupied some of the space, but the office has moved to another location.
It’s not as though the building has some advantages. There are hundreds of state employees parking in the garage each workday. It’s adjacent to the block with the Eaton Hotel and the Wichita Downtown Development Corporation, the agency charged with promoting downtown. This retail space is right across the street from the city’s bus transit center. It’s also one block away from the Intrust Bank Arena, which was promoted as a driver of commerce and activity for the surrounding area.
As can be seen in the nearby photos (click them for larger versions), a walk down this block also reveals maintenance issues that might, in some circumstances, be considered as contributing to blight. Maybe that’s why there’s evidently no demand to rent this space — except by a government office, and even it has left.
The difference
What is the difference between private ownership of assets and government ownership? A big factor is the accountability provided by markets, along with the profit motive. Private owners of rental property like this have a big incentive to keep it filled with tenants. If the private owners are able to attract tenants and control their costs, they can earn a profit. Markets impose a discipline on these costs, because landlords can charge only what the market will bear for rent. If landlords can’t attract tenants, or can’t control costs, they go out of business. That makes the property available to someone else, perhaps someone who can manage the property successfully.
Markets and the profit motive are not perfect. But when private landlords are inefficient, no one is harmed except the landlords.
Government, however, can’t earn a profit or suffer a loss. It can’t even calculate profit and loss in any meaningful sense. Usually government doesn’t account for its capital investment. That’s certainly the case with this empty retail space. A private landlord would realize that this empty space that can’t be rented has an opportunity cost that is very real. That doesn’t appear to be the case with Wichita city management.
This illustrates the weak accountability that government faces. Despite situations like this, the Wichita city manager received effusive praise from the Wichita City Council this year, along with a large raise in pay. Two years ago the incumbent Wichita mayor didn’t inspire a strong opponent, and only about 12 percent of the people bothered to vote.
Considering all the advantages this government property has, it’s failing. It has no tenants, and it’s becoming blighted. The best thing the city could do is sell this property so that the benefits of markets and the profit-and-loss system can replace city bureaucrats.
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.
There are 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. Based on the terms of the agreement, Sedgwick County received payment of $1,116,442 for the 2010 year, the first year of operation for the arena. While described as “profit” by many — and there was much crowing last year over the seemingly large amount — this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America.”
That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.
The presentation made to commissioners in February for the 2011 operating year said that the arena’s “profit” was $389,659. This is smaller than the threshold for the county to participate, so the county received nothing for 2011.
While county manager Bill Buchanan and Commissioner Dave Unruh referred to this as a profit, the true facts of the arena’s finances appear — to some degree — in the county’s comprehensive annual financial report for 2011. In this document, we learn that the arena suffered an operating loss of $5.7 million. A large part of that was due to $5.2 million in depreciation expense.
This is a much better reckoning of the economics of the Intrust Bank Arena.
Depreciation expense is not something that is paid out in cash every year. Instead, it 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. Last year, 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.”
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. 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.
Without honest discussion of numbers like these, we make decisions based on incomplete and false information. This is especially important as civic leaders agitate for another sales tax or other taxes to pay for more public investment. The sales pitch is that once the tax is collected and the assets paid for, we don’t need to consider the cost. They contend, as is the attitude of Unruh and arena boosters, that we can just sweep it under the rug and pretend it doesn’t exist. This is a false line of reasoning, and citizens ought not to be fooled.
Last week the Sedgwick County Commission heard a report from county managers regarding the financial performance of the Intrust Bank Arena. The arena, located in downtown Wichita, is owned by the county.
What citizens need to know is this: The honeymoon is over. The promised boost to downtown that arena backers promised has yet to materialize in any broad sense. When it does poke through — an example being the Ambassador Hotel — it requires many millions of taxpayer subsidy.
But perhaps most important is the realization that county leaders are not being honest with its citizens. The “profit” shown by the arena is not reckoned using anything like businesses use, or even most branches of government, for that matter. As explained in the following article from last August, Sedgwick County doesn’t recognize the large capital investment made by citizens to build the arena. Instead, it treats that sacrifice as having no relevance to the economics underlying the arena.
On top of that, the profit statement presented to commissioners is accompanied by this qualification, which the county does not explain to citizens: “[These statements are] not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America.”
Intrust Bank Arena depreciation expense ignored
By Bob Weeks
Reports that income earned by the Intrust Bank Arena is down sharply has brought the arena’s finances back into the news. The arena, located in downtown Wichita and owned by Sedgwick County, is deemed to be a success by the county and arena boosters based on “profit” figures generated during its first year of operations. But these numbers are not an honest assessment of the arena’s financial performance.
When the numbers were presented to Sedgwick County commissioners this week, commission chair Dave Unruh said that he is “pleased that we we still are showing black ink.”
He then made remarks that show the severe misunderstanding that he and almost everyone labor under regarding the nature of the spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”
The contention of Unruh and other arena boosters is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) on the arena is merely a historical artifact, something that happened in the past and that has no bearing today. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds.
Since it is only one year old, presumably the arena could be sold for something near its building cost, less an allowance for wear and tear. If not, then the county has a lot of explaining to do as to why it built an asset that has no market value.
But even if the arena has no market value — and I suspect that in reality it has very little value — it still has an economic cost that must be recognized, that cost being the sales tax collected to pay for it. While arena boosters dismiss this as past history, the county recognizes this cost each year, and will continue to do so for many years.
The county, however, doesn’t go out of its way to present the complete and accurate accounting of the arena’s cost. Instead, the county and arena boosters trumpet the “profit” earned by the arena for the county according to an operating and management agreement between the county and SMG, a company that operates the arena.
This agreement specifies a revenue sharing mechanism between the county and SMG. Based on the terms of the agreement, Sedgwick County received payment of $1,116,442 for the 2010 year. While described as profit by many — and there was much crowing over the seemingly large amount — this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America.”
That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid.
Commissioner Karl Peterjohn has warned that these figures — and the monthly “profit” figures presented to commissioners — do not include depreciation expense. That expense is a method of recognizing and accounting for the large capital cost of the arena — the cost that arena boosters dismiss.
In April Sedgwick County released that depreciation number in its 2010 Comprehensive Annual Report. The number is pretty big: $4.4 million, some four times the purported “earnings” of the arena.
Any honest accounting or reckoning of the performance of Intrust Bank Arena must take this number into account. Unruh is correct in that this depreciation expense is not a cash expense that affects cash flow. That cash was spent during the construction phase of the arena.
But depreciation expense provides a way to recognize and account for the cost of long-lived assets like buildings over their lifespan. It recognizes and respects the investment of those who paid the sales tax. When we follow standard practices like recognizing the cost of capital assets through depreciation expense, we’re forced to recognize that there’s a $4.4 million gorilla in the room that arena boosters don’t want to talk about.
Using information about arena operations contained in the operations report, we can construct what an actual income statement for the arena would look like, following generally accepted business principles. According to the statement, total operating income for 2010 was $7,005,224. Operating expenses were $4,994,488. Subtracting gives a figure of $2,010,736. This number, however, is not labeled a profit in the report. Instead, the report calls it “Increase in Net Assets Arising from Operating Activities Managed by SMG.”
An accounting of profit would have to subtract the $4.4 million in depreciation expense. Doing that results in a loss of $2,389,264. This — or something like it — is the number we should be discussing when assessing the financial performance of Intrust Bank Arena.
Fiscal conservatives — and sometimes even liberals — often speak of “running government like a business.” But here’s an example of conservative government leaders ignoring a basic business principle in order to paint a rosy picture of a government spending project.
Without honest discussion of numbers like these, we make decisions based on incomplete and false information. This is especially important as civic leaders agitate for another sales tax or other taxes to pay for more public investment. The sales pitch is that once the tax is collected and the assets paid for, we don’t need to consider the cost. They contend, as is the attitude of Unruh and arena boosters, that we can just sweep it under the rug and pretend it doesn’t exist. This is a false line of reasoning, and citizens ought not to be fooled.
Today the Wichita City Council will conduct a public hearing for the second time. The reason the council must hold the hearing again is that a mistake was made in the official notice of the hearing.
While I commend the city for realizing the mistake and following the letter of the law in conducting the hearing again, we must contrast this behavior, which is following the process according to the law, with the council’s past behavior, which has shown no regard for the spirit and substance of the law regarding public hearings.
The most recent example is when the city council approved a letter of intent to do something for which it had yet to hold a public hearing. That act made the public hearing a meaningless exercise. The council approved everything that was contained in the letter of intent, except that one item was modified, and that was not a result of the public hearing.
Another example is from 2008, when the council conducted a public hearing essentially in secret, making last-minute changes to the substance to be heard. At the time, Randy Brown, former editorial page editor for the Wichita Eagle and Executive Director of Kansas Sunshine Coalition for Open Government, agreed with my contention that the hearing was a “bait and switch” operation. Writing in a letter to the Eagle, Brown said:
Weeks is dead-on target when he says that conducting the public ‘s business in secret causes citizens to lose respect for government officials and corrupts the process of democracy (“TIF public hearing was bait and switch,” Dec. 5 Opinion). And that’s what happened when significant 11th-hour changes to the already controversial and questionable tax-increment financing plan for the downtown arena neighborhood were sneaked onto the Wichita City Council’s Tuesday agenda, essentially under cover of Monday evening’s darkness.
This may not have been a technical violation of the Kansas Open Meetings Act, but it was an aggravated assault on its spirit. Among other transgressions, we had a mockery of the public hearing process rather than an open and transparent discussion of a contentious public issue.
The Wichita officials involved should publicly apologize, and the issue should be reopened. And this time, the public should be properly notified.
It turns out that the council’s actions regarding this hearing were permissible under the letter of the law, according to the Sedgwick County District Attorney’s office.
We are left with the realization, however, that we have a city with elected officials and bureaucratic leaders that are careful to follow the letter of the law, but are unable — or unwilling — to see the larger picture regarding public policy. Substance is of little concern.
Following is my op-ed from the December 5, 2008 Wichita Eagle:
On Tuesday December 2, 2008, the Wichita City Council held a public hearing on the expansion of the Center City South Redevelopment District, commonly known as the downtown Wichita arena TIF district. As someone with an interest in this matter, I watched the city’s website for the appearance of the agenda report for this meeting. This document, also known as the “green sheets” and often several hundred pages in length, contains background information on items appearing on the meeting’s agenda.
At around 11:30 am Monday, the day before the meeting, I saw that the agenda report was available. I download it and printed the few pages of interest to me.
At the meeting Tuesday morning, I was surprised to hear council member Jim Skelton expressed his dismay that a change to the TIF plan wasn’t included in the material he printed and took home to read. This change, an addition of up to $10,000,000 in spending on parking, is material to the project. It’s also controversial, and if the public had known of this plan, I’m sure that many speakers would have attended the public hearing.
But the public didn’t have much notice of this controversial change to the plan. Inspection of the agenda report document — the version that contains the parking proposal — reveals that it was created at 4:30 pm on Monday. I don’t know how much longer after that it took to be placed on the city’s website. But we can conclude that citizens — and at least one city council member — didn’t have much time to discuss and debate the desirability of this parking plan.
The news media didn’t have time, either. Reporting in the Wichita Eagle on Monday and Tuesday didn’t mention the addition of the money for parking.
This last-minute change to the TIF plan tells us a few things. First, it reveals that the downtown arena TIF plan is a work in progress, with major components added on-the-fly just a few days before the meeting. That alone gives us reason to doubt its wisdom. Citizens should demand that the plan be withdrawn until we have sufficient time to discuss and deliberate matters as important as this. What happened on Tuesday doesn’t qualify as a meaningful public hearing on the actual plan. A better description is political bait and switch.
Second, when the business of democracy is conducted like this, citizens lose respect for both the government officials involved and the system itself. Instead of openness and transparency in government, we have citizens and, apparently, even elected officials shut out of the process.
Third, important questions arise: Why was the addition of the parking plan not made public until the eleventh hour? Was this done intentionally, so that opponents would not have time to prepare, or to even make arrangements to attend the meeting? Or was it simple incompetence and lack of care?
The officials involved — council members Jeff Longwell and Lavonta Williams, who negotiated the addition of the parking with county commissioners; Allen Bell, who is Wichita’s director of urban development; and Mayor Carl Brewer — need to answer to the citizens of Wichita as to why this important business was conducted in this haphazard manner that disrespects citizen involvement.
Reports that income earned by the Intrust Bank Arena is down sharply has brought the arena’s finances back into the news. The arena, located in downtown Wichita and owned by Sedgwick County, is deemed to be a success by the county and arena boosters based on “profit” figures generated during its first year of operations. But these numbers are not an honest assessment of the arena’s financial performance.
When the numbers were presented to Sedgwick County commissioners this week, commission chair Dave Unruh said that he is “pleased that we we still are showing black ink.”
He then made remarks that show the severe misunderstanding that he and almost everyone labor under regarding the nature of the spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”
The contention of Unruh and other arena boosters is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) on the arena is merely a historical artifact, something that happened in the past and that has no bearing today. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds.
Since it is only one year old, presumably the arena could be sold for something near its building cost, less an allowance for wear and tear. If not, then the county has a lot of explaining to do as to why it built an asset that has no market value.
But even if the arena has no market value — and I suspect that in reality it has very little value — it still has an economic cost that must be recognized, that cost being the sales tax collected to pay for it. While arena boosters dismiss this as past history, the county recognizes this cost each year, and will continue to do so for many years.
The county, however, doesn’t go out of its way to present the complete and accurate accounting of the arena’s cost. Instead, the county and arena boosters trumpet the “profit” earned by the arena for the county according to an operating and management agreement between the county and SMG, a company that operates the arena.
This agreement specifies a revenue sharing mechanism between the county and SMG. Based on the terms of the agreement, Sedgwick County received payment of $1,116,442 for the 2010 year. While described as profit by many — and there was much crowing over the seemingly large amount — this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America.”
That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid.
Commissioner Karl Peterjohn has warned that these figures — and the monthly “profit” figures presented to commissioners — do not include depreciation expense. That expense is a method of recognizing and accounting for the large capital cost of the arena — the cost that arena boosters dismiss.
In April Sedgwick County released that depreciation number in its 2010 Comprehensive Annual Report. The number is pretty big: $4.4 million, some four times the purported “earnings” of the arena.
Any honest accounting or reckoning of the performance of Intrust Bank Arena must take this number into account. Unruh is correct in that this depreciation expense is not a cash expense that affects cash flow. That cash was spent during the construction phase of the arena.
But depreciation expense provides a way to recognize and account for the cost of long-lived assets like buildings over their lifespan. It recognizes and respects the investment of those who paid the sales tax. When we follow standard practices like recognizing the cost of capital assets through depreciation expense, we’re forced to recognize that there’s a $4.4 million gorilla in the room that arena boosters don’t want to talk about.
Using information about arena operations contained in the operations report, we can construct what an actual income statement for the arena would look like, following generally accepted business principles. According to the statement, total operating income for 2010 was $7,005,224. Operating expenses were $4,994,488. Subtracting gives a figure of $2,010,736. This number, however, is not labeled a profit in the report. Instead, the report calls it “Increase in Net Assets Arising from Operating Activities Managed by SMG.”
An accounting of profit would have to subtract the $4.4 million in depreciation expense. Doing that results in a loss of $2,389,264. This — or something like it — is the number we should be discussing when assessing the financial performance of Intrust Bank Arena.
Fiscal conservatives — and sometimes even liberals — often speak of “running government like a business.” As an example, Unruh’s campaign website from last year states “… as a business owner he works hard to apply good business principles to County government …”
But here’s an example of conservative government leaders ignoring a basic business principle in order to paint a rosy picture of a government spending project. Unruh is not alone in doing this.
Without honest discussion of numbers like these, we make decisions based on incomplete and false information. This is especially important as civic leaders agitate for another sales tax or other taxes to pay for more public investment. The sales pitch is that once the tax is collected and the assets paid for, we don’t need to consider the cost. They contend, as is the attitude of Unruh and arena boosters, that we can just sweep it under the rug and pretend it doesn’t exist. This is a false line of reasoning, and citizens ought not to be fooled.
Holman’s column of yesterday complained of lack of transparency in the arena’s operations: “But with hindsight, and with the Intrust Bank Arena open three months and generating revenue, it’s more clear all the time that county leaders gave away too much oversight authority to SMG, leaving citizens in the strange and frustrating position of having too little hard information about how their $206 million investment is doing.”
The sudden departure of arena manager Chris Presson under circumstances that can only be described as alarming will add to the concern of citizens. Well, not all citizens. Some arena boosters simply don’t care how much of a burden the arena may become to county taxpayers, as long as they have their arena.
Tomorrow’s meeting of the Wichita city council will feature a public hearing as to whether a tax increment financing district that benefits Real Development should be modified. The TIF district is already approved in the amount of $9.3 million. The applicants are asking that the city’s contribution be increased to $11.8 million, plus approval of changes to the project plan.
The first issue we should address is the purpose of these public hearings. Presumably notice of their existence is given not only so citizens and interested parties can plan to attend, but also so that there can be discussion of the details of the issue. This second reason is not fulfilled to any meaningful extent. There just isn’t time for anything to happen. The agenda report for this matter did not appear on the city’s website until around noon Friday, just two business days before the hearing.
Furthermore, the plan may be revised as late as today — the day before the public hearing — according to reporting in today’s Wichita Eagle.
There needs to be more time if these public hearings are to be anything but a sham. The city approved April 13 as the date for the public hearing on March 23. So the public hearing is announced, but details of the project are not known. How will the public — much less city council members — become aware of the final plan?
The plan to be heard tomorrow is the second revision of the original plan, which was first approved in 2007. Some may criticize Real Development for the shifting plan. But this is the nature of business. Change, however, is something that government bureaucracy is particularly ill-equipped to deal with.
There are reasons to be concerned with these particular applicants. Several floors in buildings they own in Wichita have been subject of foreclosure actions. While it is not Real Development that failed to pay the loans that were foreclosed on, this happened in buildings Real Development owns and developed with a condominium-style of ownership.
There is also issue of allegations made by tenants of Real Development that it is not performing on its obligations. These tenants will not come forward in public, as they are afraid that if the city stops subsidizing Real Development, the tenants will suffer.
But the largest and overriding issue is that the city should not be directing taxpayer investment outside the market process. It is an undeniable fact that the city is considering forcing Wichita taxpayers to risk an investment of around $10 million in this project. And if the investment doesn’t work out, the city is likely to force Wichitans to spend even more money on this project, as the city did when it made a no-interest and low-interest loan to a downtown theater that was underperforming in its TIF district.
It would be one thing if TIF districts were good for the city, but there is no such evidence. There is evidence that TIF districts are great for the developers — after all, wouldn’t like to have their increase in property taxes spent for their exclusive benefit, which is the purpose of a TIF district — but not so good for the rest of the city. The article Tax Increment Financing: A Tool for Local Economic Development by economists Richard F. Dye and David F. Merriman states, in its conclusion:
TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.
So TIFs are good for the favored development — not a surprising finding. What about the rest of the city? Continuing from the same study:
We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.
So TIF districts may actually reduce the rate of economic growth in the rest of the city.
TIF does not increase the total amount of development that takes place in a city or region; it merely transfers development from one part of the region to another. … The new developments in the TIF districts consume fire, police, and other services, but since they don’t pay for those services, people in the rest of the city either have to pay higher taxes or accept a lower level of services. This means people outside the district lose twice: first when developments that might have enhanced their property values are enticed into the TIF district and second when they pay more taxes or receive less services because of the TIF district.
Similar findings apply to the issuance of industrial revenue bonds, as the city issued last week and issues frequently.
Finally, I have a simple question for the mayor, city council, and city staff: Will any downtown development occur without public subsidy?
Here’s something of concern to me in the story: “But he [Sedgwick County chief financial officer Chris Chronis] pushed for the money to remain in the arena and pavilions’ operating and maintenance reserve fund, which last month had just less than $14 million, because taking money out of the fund would drain it four years earlier than expected — in 2024.”
Evidently the county has financial projections for the arena all the way out to 2018, and possibly beyond. That is a very long time into the future, and any projections about the performance of the arena over this period would be based on assumptions that can’t be estimated with anything approaching certainty.
Projections with this precision made about events so far in the future surrounded by so much uncertainty remind me of the saying that economists use a decimal point to show they have a sense of humor.
Back to the present: Commissioner Dave Unruh told the Eagle that the county did not hire any new staff to perform work that has an estimated value of $2.6 million. My question is this: Is this evidence that there was $2.6 million of slack time in county employee’s schedules? How were they able to get this vast amount of work accomplished? Perhaps after the arena work that has occupied $2.6 million of staff time is complete, we could hire out this staff to earn revenue for the county, as it seems they will have time on their hands.
Regarding the contention that voters in 2004 were promised that no property tax money would be used on the arena, Unruh was quoted by the Eagle as saying: “I do think that we made a very strong commitment that all the sales tax money would be used for the arena and pavilions.”
It seems that now Sedgwick County voters have a new concern: When politicians make a promise, do we have to ask them if this is a regular commitment or a very strong commitment? Or are there other types of commitments that we don’t know about?
Any rational assessment of the success of the Intrust Bank Arena in downtown Wichita must realize that the arena is in its honeymoon period. Will the parade of big-name stars playing to a packed arena continue for long? Will the Wichita Eagle and local television stations continue to breathlessly announce every upcoming event?
Until initial enthusiasm dies down and the arena has a track record of a year or more, we simply have no idea what the financial performance of the arena will be. That’s what’s important.
This premature glowing assessment of the arena’s success is dangerous in that it leads us to believe that there is a positive role for large government projects in Wichita. Worse, people are lead to think that taxation is a good way to pay for such things. As an example, the one cent sales tax used to pay for the arena is presently touted as a model for funding other government spending, ranging from Governor Parkinson’s proposal for a sales tax to fund state government to what surely will be a proposal for a sales tax to fund the revitalization of downtown Wichita.
Proponents say that the sales tax was painless, so why not do it again? Some were sorry to see it expire. As the sales tax that funded the arena was nearing its end, Sedgwick County Commissioner Tim Norton “wondered … whether a 1 percent sales tax could help the county raise revenue.” (“Norton floats idea of 1 percent county sales tax,” Wichita Eagle, April 4, 2007)
But the tax was not painless. Undoubtedly, the employment landscape was shifted in Sedgwick County because of the tax, and that caused some people to be unemployed. My post Prepare for sales tax-induced job effects now reports on what happened in Little Rock when that city’s arena was built. It would be reasonable to think that similar effects happened here.
Last year in Portland, a proposal to build a new minor league baseball stadium was found to produce a net job loss. An economics consulting firm reported: “Thus, the Lent’s project would have a net impact of a 182 job-year loss on the City’s economy (a gain of 175 from the construction less a loss of 357 due to reduced spending by households and businesses because of higher taxes).”
It also concluded that “If those individuals who put their money into baseball via taxes are allowed to put that money into the private market, that same amount of money would actually yield more jobs.” Reportedly, Portland’s mayor “appears to have sat on” the study and was not eager to release it.
This effect — a shiny, highly touted public works project being much more visible than private dispersed economic activity — was known long ago and explained by Henry Hazlitt in his classic work Economics in One Lesson:
Therefore for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $1,000,000 taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project.
We were also told that the arena would be a driver of downtown development. But in its first test, the Wichita City Council evidently didn’t believe what arena boosters told them, as it voted to grant several million dollars in subsidy to the developer of a hotel just a few blocks from the arena. Will all future development around the arena — if it happens — require similar subsidy?
A note to readers: I served as co-manager of Peterjohn’s campaign in 2008.
The commemorative plaque on the Intrust Bank Arena in downtown Wichita, Kansas.
On the commemorative plaque outside the Intrust Bank Arena in downtown Wichita, there’s a missing name.
The names of eight Sedgwick County commissioners appear, including all who were members of the Commission when the arena sales tax passed in November 2004, all who have served since then, and all present commissioners.
Except for one: current third district commissioner Karl Peterjohn.
In 2004 Peterjohn led opposition to the sales tax ballot measure that funded the arena. When he decided early in 2008 that he would run for the commission against long-time Republican incumbent Tom Winters, Peterjohn told Winters that the next commissioner would have their name on a plaque on the arena. On primary election night, when Peterjohn defeated Winters, Peterjohn told me “I told him [Winters] he could have that spot, and I’m keeping my word.”
It was a gracious gesture.
There’s been a small controversy surrounding Peterjohn in his new role as arena supporter. He participated in the arena’s recent ribbon-cutting ceremony. More importantly, he voted last February for a $1.7 million seating upgrade. That upgrade would reduce the cost of transition between events, and also improve seating and viewing.
That vote, along with participation in the ribbon-cutting, is central to Peterjohn’s goal of seeing that the arena is a success and doesn’t become a fiscal burden on taxpayers. Although the contract with SMG, the arena’s management firm, shields Sedgwick County from losses, that contract comes to an end someday. It’s also full of loopholes that, in my opinion, would allow SMG to make an early exit if arena finances are not favorable.
Working for the success of the arena, therefore, is a logical continuation of Peterjohn’s concern for the taxpayer, the same concern as when he opposed the arena in 2004, he said.
There’s also been grumbling that county commissioners and bureaucrats will receive perks such as tickets and premium parking passes to arena events. Peterjohn said he’s received no tickets or parking perks.
In December 2014, in a look at the first five years of the arena, its manager 
In December 2014, in a look at the first five years of the arena, its manager 
