Voice For Liberty

Tag: Downtown Wichita arena

  • Intrust Bank Arena depreciation expense ignored

    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.

  • Wichita’s Intrust Bank Arena shrouded in mystery

    Okay, maybe that’s a little over-hyped, but when arena cheerleader Rhonda Holman of the Wichita Eagle starts to question the operations of Intrust Bank Arena in downtown Wichita, there must be something going on.

    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.

    The lack of transparency at the arena and some county commissioner’s lack of concern about this important issue has been the subject of articles on this site. See Wichita downtown arena open records failure, Wichita downtown arena contract seems to require Sedgwick County approval, and Sedgwick County keeps lease agreement secret.

  • Wichita Exchange Place TIF should be rejected

    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.

    Cato Institute Senior Fellow Randal O’Toole has written this about tax increment financing:

    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?

    Resources on tax increment financing:

    Exchange Place Redevelopment Plan April 13, 2010

  • In Sedgwick County, is there slack time?

    As reported in the Wichita Eagle, the Sedgwick County Commission decided to reimburse the county for time its employees spent working on arena-related matters. The money will come from the sales tax that was collected to build the Intrust Bank Arena in downtown Wichita. The amount of money the commission decided to transfer is $1.6 million, although according to the Eagle, the total cost could reach $2.6 million.

    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?

  • Assessment of Wichita’s Intrust Bank Arena’s success premature

    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?

  • Intrust Bank Arena’s missing name

    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.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.

    A Wichita Eagle blog post by Deb Gruver on this topic is Karl Peterjohn’s name not on Intrust Bank Arena sign.

  • Ticket scalping is a market function, not a criminal activity

    At the Intrust Bank Arena in downtown Wichita, some concerts are very popular, which leads to people frustrated at two things: the inability to buy tickets when they go on sale, and then the high prices that ticket scalpers ask for tickets on the aftermarket.

    I understand the frustration of the stymied ticket buyers. Who wants to pay $300 for a ticket that was sold by the arena’s box office for $50? It would be great if everyone who wanted to attend could do so for $50 — or for $5, for that matter. And that gets to the heart of the problem and why it isn’t likely to be solved: human behavior and economics.

    Walter Block has a chapter in his book Defending the Undefendable that defends the ticket scalper. (The book in pdf form is here.)

    As it turns out, scalping is a beneficial economic activity. But even if you don’t believe this, scalping could be avoided if venues like the arena would sell tickets in a different manner.

    According to Block, scalping requires “a fixed, invariable supply of tickets.” After all , if the supply of tickets was unlimited, everyone could buy all they wanted at list price (the price printed on the ticket, and what the venue sells them for).

    Also, scalping requires “the ticket price chosen by management be lower than the ‘market clearing price.’” Markets clear when people want to buy the same number of tickets that are for sale. This balance is achieved by allowing the price of the tickets to freely adjust. When the list price of the ticket is less than what some people are willing to pay, that’s when scalpers have an opportunity to earn profits.

    This points to one way that scalping could be eliminated, if concert promoters wanted to: They could sell tickets like shares of stock or bushels of wheat are sold. These items don’t have a list price. Instead, their price is whatever people are willing to pay.

    Why would concert promoters price tickets at less than some people are willing to pay? If a scalper can get say, $300 for a ticket that the box office sells for $50, why doesn’t the box office price the ticket at $300? Or maybe $200? Here’s what Block writes:

    For one thing, lower prices invite a large audience. Long lines of people waiting to enter a theater or ballpark constitutes free publicity. In other words, management forgoes higher prices in order to save money it might have had to spend on advertising. In addition, managers are loath to raise ticket prices — even though they would have little difficulty selling them for a big event or special movie — for fear of a backlash. Many people feel that there is a “fair” price for a movie ticket, and managers are responsive to this feeling.

    There are several other motivations, less compelling, for keeping prices fixed at below equilibrium levels. Taken together they ensure that this pricing policy — the third condition necessary for scalping — will continue.

    In other words, better for scalpers to bear the brunt of public ire for setting market-clearing prices. Can you imagine the public backlash at the Intrust Bank Arena and Sedgwick County if ticket prices for very popular concerts were set at market-clearing prices?

    The chapter goes on to explain the two ways that scarce goods — concert tickets in this care — are rationed: price rationing, and non-price rationing. Price rationing, as you might imagine, relies on the price mechanism to determine a market-clearing price so that supply equals demand.

    Non-price rationing, on the other hand, relies on something else. Block mentions “first-come, first served” (camping out the night before at the box office window) and favoritism (those connected to or favored in some way by arena management get special privileges) as two methods of non-price rationing. The Intrust Bank Arena has used another method — a lottery — for some concerts.

    So which is “fair?” Does price rationing favor those with the ability to pay high prices? Certainly scalping makes it easier for rich people to obtain scarce tickets. But Block says that scalping provides entrepreneurial opportunities. Someone with a small amount of capital (just enough to buy one or more tickets) but a lot of spare time (someone without a job) can camp out in line and earn profits by selling the tickets. Or, they could simply wait in line and be paid a wage.

    By the way, scalpers are not guaranteed profits. If there is not much demand for tickets for an event, scalpers will have to sell the tickets at a loss — or they may not be able to sell them at any price.

    Back to Wichita: According to a Wichita Eagle article, a group named Taxpayers for Tickets has been formed to take action against scalping. Reading the website, it seems that the group’s focus is on more laws and enforcement of them to effect the goal of getting tickets in the hands of the taxpayers who paid for the construction of the Intrust Bank Arena.

    I don’t favor this approach. First, as we’ve seen, scalping is a socially beneficial activity that provides market-clearing prices for tickets.

    Second, there is plenty of actual crime in our community that causes death, injury, and loss of property. We don’t need to squander law enforcement resources on victimless crimes like people willingly and voluntarily engaging in market transactions.

    In a letter published in the Wichita Eagle, Todd Allen, head of Taxpayers for Tickets, wrote “I figured that since the taxpayers paid for the arena, that makes us the owners.” I hate to disappoint Mr. Allen, but that’s far from the case. Try requesting a contract, as in Sedgwick County keeps lease agreement secret. Not even Sedgwick County Commissioners are able to see the lease of the arena’s flagship tenant.

    Another article on ticket scalping is Ticket Scalpers Are Hidden Heroes.

  • Wichita arena lands a whopper

    The Intrust Bank Arena in downtown Wichita has landed NCAA women’s basketball first- and second-round tournament games in 2011.

    Recently, the NCAA bypassed the Wichita arena when selecting sites for men’s NCAA games. On KAKE TV, arena manager Chris Presson said women’s games are a testing ground for something “perceived to be bigger. … Certainly the women’s to us is as big as the men’s and is as big a deal to us as the men’s would be. We’re more than content, more than happy with what we’ve got.”

    According to Associated Press reporting from earlier this year, “The first two rounds drew an average of 4,100 people.” The Wichita Eagle reports 4,915 averages attendance for all tournament games.

    Is Presson being reasonable: women’s games, at 4,100 per game, are equivalent to men’s games, which are likely to sell out the arena? It’s his job to promote the arena, but statements like this are not reasonable.

    The publicly-supported arena in downtown Wichita remains a contentious issue. Comments left to a recent post of mine about the arena provide some insight into the thinking of arena tax supporters.

    One comment writer said that instead of complaining, I should be supporting the arena. He may have forgotten the extra sales tax that I contributed to pay for the arena. Doesn’t that count?

    Another wrote: “My question to you is since the arena has been built, do you want it to succeed or fail?” I guess this writer didn’t read the final sentence of the post, which is: “Ultimately, it is the Sedgwick County taxpayer who is financially responsible for the arena, and it is they who must hope for success.”

    So yes, I do hope that the arena is a success. As someone who is opposed to taxation — that’s why I opposed the arena sales tax ballot measure — I sincerely hope that tax revenues are not required to support the arena. Arena tax supporters have already shown that they’re willing to tax one person to build a playhouse for themselves, so I don’t suspect they’ll be opposed to future tax support of the arena, should it become necessary.

  • Low NBA attendance in Wichita danger sign for Intrust Bank Arena

    The Intrust Bank Arena management firm SMG must be wondering what it bit off in Wichita. Last night NBA professional basketball players put sneaker to floor in Wichita for the first time in 14 years, and only an estimated 8,000 fans showed up. (Estimate is by the Wichita Eagle.)

    The game was held at the Charles Koch arena on the campus of Wichita State University. That arena has a capacity, according to the goshockers website, of 10,400.

    Wichita downtown arena boosters told voters that if we passed the tax, we’d have lots of events like this, and lots of fans would attend. But in this trial run of big-time professional sports in Wichita, the fans that did attend would fill barely more than half of the new downtown Wichita arena.

    Arena apologists are likely to come up with a variety of excuses for this embarrassingly poor turnout: It was only an exhibition game. It wasn’t at the downtown arena. It wasn’t the right teams. It was drizzling rain. There will always be excuses.

    The citizens of Sedgwick County are going to have to hope that the Intrust Bank Arena can do a better job drawing fans. Even though the SMG contract puts that firm on the hook for losses, that contract has a lot of ways for SMG to wiggle out, even before its five year management term expires. Ultimately, it is the Sedgwick County taxpayer who is financially responsible for the arena, and it is they who must hope for success.