“Actually what we found out is when our city fathers put in that park years ago they put the park in on private development land and so the development’s actually not on Naftzger Park. Naftzger Park used to be planted on private development land and so they had to change the boundaries of the park.”
The mayor blamed past city administrations for not being to read a survey. (Click here to view the video starting with this question.)
Chase M. Billingham, who is assistant professor of sociology at Wichita State University, has researched the history of this part of downtown. 1 He submitted a piece to the Wichita Eagle shortly after that episode of Call the Mayor aired. He wrote:
This claim — that the public park was erroneously built on privately owned land — has been one of the most common arguments offered by city officials in favor of their strategy to bulldoze Naftzger Park and rebuild it on a new footprint. This argument has been voiced repeatedly by elected officials and city staff during City Council meetings and public hearings. As the developers of the Spaghetti Works property have begun to build a new mixed-use development there, the city has maintained that it must fix that previous error and restore the developers’ property rights by relinquishing Naftzger Park’s eastern edge.
The claim that Naftzger Park was built on private land is wrong, however, and it epitomizes the disregard for history and due diligence that has characterized much of the city’s disjointed effort to overhaul this key public downtown space.
Billingham then explained the documented history of land ownership in the area, with the upshot being this: “As a result, small areas on the eastern edge of the park did, indeed, sit on privately owned land. But it was not because the park was built on private land; instead, it was because Wichita sold parts of its own public park to private owners for far less than it had paid for the land just a few years earlier.” (emphasis added)
Concluding, he wrote:
When city officials argue that destroying and rebuilding Naftzger Park was necessary, in part, because their predecessors mistakenly built the public park on private land, they are not being truthful. Among other questions surrounding the demolition of that important public space, then, Wichitans deserve to know why their leaders were so eager to relinquish the public access to this land that they had been entitled to for decades.
Why is this incident from March relevant today, two months later? Because on the May 30, 2019 edition of the monthly show Call the Mayor, Longwell repeated the same falsehood.
I’m reluctant to call someone a liar, as a lie means “a false statement deliberately presented as being true” or “something meant to deceive.” But as Billingham wrote, Wichita city officials, including Longwell, are not telling the truth.
Mayor Longwell, along with other Wichita city officials, had an opportunity to learn the truth in both the online and print editions of the largest newspaper in Kansas. If they did not agree with Billingham’s research and conclusion, there are many ways to have a public dialog on the matter. For example, the city has a popular website and social media presences, with the city’s Facebook page being liked by 27,230 people. 2 The city has a communications staff, including a strategic communications director, marketing services director, assistant director of strategic communications, and communications and special events manager. 3 There is a city manager, assistant city manager, six city council members, and a fleet of bureaucrats.
Don’t any of these people care about the truth? Don’t they want to help the mayor of the city present accurate and truthful information?
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Notes
Billingham is also the author of a fascinating history of the area, but it was published in an academic journal that is not freely available online. See Billingham, C. M. (2017) “Waiting for Bobos: Displacement and Impeded Gentrification in a Midwestern City”, City & Community, 16(2), pp. 145–168. doi: 10.1111/cico.12235. ↩
There is an opportunity for Wichita to break the logjam holding up development at WaterWalk.
Critics of city development projects point to WaterWalk as an example of a failed downtown development. Some $41 million of city funds were spent there with few positive results, With the closing of the Gander Mountain store, its fortunes were trending downwards until the King of Freight deal was announced. Although, it is debatable whether offices are a good use for this property, given its promotion as “Wichita’s Next Great Gathering Place,” a center of retail, entertainment, and residence. 1
The King of Freight deal might be a way to get something from a failed development, at least for now. But the city could do more.
The city has many excuses for the failure of WaterWalk. In a recent social media town hall concerning the new baseball stadium and surrounding development, the city’s attitude was clear: WaterWalk is different, the city says. In the social media town hall, the city stated, “Waterwalk wasn’t the deal we put together nor did it have the safeguards of this project. Waterwalk is not a city owned development.” 2
(While the city criticizes the WaterWalk deal for not having safeguards, the protections built in the baseball deal aren’t very strong. And while the city says “WaterWalk is not a city owned development,” neither is the ballpark land development deal. Remember, the city is selling the land.)
What is the meaning of “we?” True, most current city officials weren’t in office at the time of the WaterWalk deal. KFDI reported “Mayor Longwell said it was unfair to “armchair quarterback” the decision that led to the the Waterwalk, especially since everyone on the council, including the Mayor, were not there for the decisions that led to the Waterwalk.”
But there is a grain of truth in the city’s answer. The city granted development rights for the WaterWalk property to a private development group, and there are about 85 years left in the agreement. That group is now headed by Jack P. DeBoer. He is in control of the land and its use.
That’s troubling. Recently DeBoer confessed to being “confounded” by WaterWalk, telling the Wichita Eagle, “It’s a business I don’t know anything about.” 3
DeBoer has had many years to produce development at WaterWalk. He has the ability to earn profit. But having produced very little and being “confounded” by WaterWalk, I think the key to moving forward is for the city to remove DeBoer and his group from the picture.
DeBoer has a long-term development deal with the city. Now he is asking the city to reconfigure a lease in which he is the tenant. Presumably, the changes he wants are worth something to him.
That’s an opportunity for the city to get something in return. I don’t know what that “something” might be, but this is an opportunity for the city to get some type of modification that might lead to progress at WaterWalk.
A Wichita firm plans to move its offices to what was billed as the city’s premier entertainment district.
King of Freight, a Wichita freight brokerage firm, is planning to move its operations to the vacant Gander Mountain building in WaterWalk. This requires a modification to the lease of the land.
It’s important to recognize that King of Freight is not the tenant in the lease. The landlord is the City of Wichita. The tenant is WaterWalk LLC, a Kansas limited liability company, whose president is Jack P. DeBoer. The lease covers only the land, not the building. The city does not own the building. While the city rents the land to DeBoer, there is undoubtedly a deal between him and King of Freight. Details of that are unknown.
When WaterWalk was conceived, the goal was a destination of retail, entertainment, and residences, and some $41 million of tax money was spent. The original lease for the Gander Mountain ground reflected that. Now, that a non-retail firm will be using the ground, a change was needed.
The reason is that the original lease included a provision for “additional annual rent.” If the business — Gander Mountain — exceeded certain financial parameters, the city could collect additional rent. The additional rent clause was never triggered. Other WaterWalk deals with similar provisions have never paid additional rent, either. 1)
The new lease abolishes the additional rent provision, although it could be reinstated if employment goals are not met. Since the additional rent clause is toothless, so there is no real penalty.
The tenant will continue to pay the city $1 per year in rent. King of Freight will pay $15 per month to use city parking spaces. This is perhaps half the market rate for long-term parking arrangements.
Is the move of King of Freight a good deal for the city and its citizens? King of Freight anticipates adding jobs in the future, and the new lease with the city requires certain job goals to be met. But immediately, the effect is simply moving employees from one downtown office to another. When King of Freight occupies new space, empty space will be left behind.
While putting the Gander Mountain building to use is good, its use as office space moves away from the original concept for WaterWalk, once touted as “Wichita’s Next Great Gathering Place.” 2
Will retail and entertainment establishments wish to locate near an office building? They didn’t want to locate in WaterWalk anyway, so maybe there is no change.
Of interest is DeBoer’s confession of being “confounded” by WaterWalk, recently telling the Wichita Eagle, “It’s a business I don’t know anything about.” 3
Before that, he told the Eagle that whatever becomes of the Gander Mountain building, it will be “something fun and good for the city.” 4
I don’t think that goal has been realized.
Of note: DeBoer told the Eagle he’s had opportunities to “do a restaurant or something,” but he declined. Former Wichita Mayor Carl Brewer, in State of the City addresses, promised specific named restaurants would be opening in WaterWalk. 5
In more detail
Excerpts from the city’s agenda packet for this item:
“The lease’s current rent requirement, which was drafted for a retail use, would be suspended if the job requirement is met, and would terminate in 10 years if KOF and its entities maintains the presence of 400 net new jobs in Wichita through the 10-year period.”
“KOF has also agreed to pay for parking spaces at an initial rate of $15/month per space. Revenue from KOF’s employee parking is estimated at approximately $70,000/year.”
From the lease agreement: “Section 5.01. Minimum Rent. As of the date first written above, Tenant has paid Landlord a minimum fixed annual rent (“Minimum Rent”) of One Dollar ($1) in one (1) installment covering the Term of this Lease as defined in Article I above.”
“Section 5.02. Additional Rent. The Tenant will also pay, without notice, and without abatement, deduction, or setoff, except as otherwise specifically allowed herein, as additional rent, all sums, taxes, assessments, costs, expenses, and other payments which the Tenant in any of the provisions of this Lease assumes or agrees to pay, and, in the event of any nonpayment thereof, the Landlord shall have (in addition to all other rights and remedies) all the rights and remedies provided herein or by law in the case of nonpayment of rent.”
This section then describes the mechanism of calculating “Additional Annual Rent.” This mechanism was crafted for a retail store so that if “Adjusted Net Cash Flow” was ever positive, the city would be paid 25 percent of that. But the activity of the retail store, Gander Mountain, never triggered the payment of additional rent. 6
The section goes on to modify the additional rent provision for uses other than retail, like an office: “No Additional Retail Rent and no Additional Rent involving any payment of any portion of the Adjusted Net Cash Flow shall be owed for any use of the Premises that is not a Retail Use under codes 4400 through 454390 of the 2017 NAICS.”
The property will be paying property taxes: “Section 6.01. Taxes. Tenant shall pay as additional rent during the Term and any extensions thereof, all ad valorem taxes, and all other governmental taxes or charges that may be levied against the Premises.”
Since the property is within a tax increment financing (TIF) district, the taxes flow to that, not to fund the general operations of government.
“Section 9.03. Parking. The parties agree that Tenant’s employees will have nonexclusive access to the 430-space Parking Garage and the 60 spaces of surface parking under U.S. 400 (“Kellogg”) for an initial rate of $15/month per employee for parking between the hours of 8:00 a.m. – 6:00 p.m., Mondays-Fridays. Tenant shall be responsible for providing a monthly report of the number of employees who are parking in Parking Garage and on surface parking lot under Kellogg, and shall remit $15.00 per employee on a monthly basis. At each one-year anniversary of this agreement, the parking rate shall increase 3%.”
“Section 16.06. Assignment; Sublease. Tenant may freely assign or sublease all or any portion of the Premises without Landlord’s consent.”
In his 2008 address, Brewer promised specific development at the struggling Waterfront development, which is heavily subsidized. Beaming with pride, Brewer said to the audience: “And, great strides are being made at Wichita Waterwalk. The topping out ceremony for Waterwalk Place is scheduled for this Thursday and I invite everyone to this event. I am pleased to announce two more national tenants that will be a part of the WaterWalk restaurant and entertainment development. … I am pleased to announce two more national tenants that will be a part of the WaterWalk restaurant and entertainment development. Joining Saddle Ranch Chop House will be Funny Bone Comedy Club and Wet Willies restaurant and daiquiri bar. These are just a couple of the fun and exciting tenants that will help make WaterWalk — Wichita’s Next Great Gathering Place.” This address was delivered a year before DoBoer took full control over WaterWalk, although he was involved before that. ↩
Email with Wichita City Manager Layton, May 10, 2019. ↩
A truthful accounting of the finances of Intrust Bank Arena in downtown Wichita shows a large loss. Despite hosting the NCAA basketball tournament, the arena’s “net income” fell.
The true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters cite a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and it hides the true economics of the arena. What’s missing is depreciation expense.
Intrust Bank Arena Payments to Sedgwick County. Click for largerThere are at least two ways of looking at the finance of the arena. Nearly all attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and SMG, a company that operates the arena.
This agreement specifies a revenue sharing mechanism between the county and SMG. For 2108, the accounting method used in this agreement produced a profit, or “net building income,” of $647,634 to be split (not equally) between SMG and the county. The county’s share was $123,817. 1
Intrust Bank Arena Payments to Sedgwick County. Click for larger.While described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations in conformity with accounting principles generally accepted in the United States of America.” 2
That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.
A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2018 Comprehensive Annual Financial Report for Sedgwick County. 3 This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially last year. In that respect, it is a report card of our ability to manage our financial resources.”
Regarding the arena in 2018, the CAFR states:
The Arena Fund represents the activity of the INTRUST Bank Arena. The facility is operated by a private company; the County incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any, and naming rights fees. The Arena Fund had an operating loss of $4.5 million. The loss can be attributed to $4.8 million in depreciation expense.
Financial statements in the same document show that $4,783,229 was charged for depreciation in 2017. If we subtract the SMG payment to the county of $123,817 from depreciation expense, we learn that the Intrust Bank Arena lost $4,659,412 in 2018.
(Of note, 2018 was the year the arena hosted a round of NCAA men’s basketball tournament games. For that year, the payment from SMG to the county was down by 58.8 percent from $300,414 in 2017. Attendance rose by 4.2 percent.)
Depreciation expense is not something that is paid out in cash. That is, Sedgwick County did not write a check for $4,659,412 to pay depreciation expense. Instead, depreciation accounting provides a way to recognize and account for the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.
But not many of our civic leaders recognize this, at least publicly. We — frequently — observe our governmental and civic leaders telling us that we must “run government like a business.” The county’s financial report makes mention of this: “Sedgwick County has one business-type activity, the Arena fund. Net position for fiscal year 2018 decreased by $4.7 million to $151.6 million. Of that $151.6 million, $142.9 million is invested in capital assets. The decrease can be attributed to depreciation, which was $4.8 million.”4 (emphasis added)
At the same time, these leaders avoid frank and realistic discussion of economic facts. As an example, in years past Commissioner Dave Unruh made remarks that illustrate the severe misunderstanding under which he and almost everyone labor regarding the nature of spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”
The contention — witting or not — is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) in the arena is merely a historical artifact, something that happened in the past, something that has no bearing today. There is no opportunity cost, according to this view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds. Since Kansas is one of the few states that adds sales tax to food, low-income households paid extra sales tax on their groceries to pay for the arena — an arena where they may not be able to afford tickets.
Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct that depreciation expense is not a cash expense that affects cash flow, it is an economic reality that can’t be ignored — except by politicians, apparently. The Wichita Eagle and Wichita Business Journal aid in promoting this deception.
The upshot: We’re evaluating government and making decisions based on incomplete and false information, just to gratify the egos of self-serving politicians and bureaucrats.
Reporting on Intrust Bank Arena financial data
In February 2015 the Wichita Eaglereported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time. Neither did the Eagle article.
In December 2014, in a look at the first five years of the arena, its manager told the Wichita Eagle this: “‘We know from a financial standpoint, the building has been successful. Every year, it’s always been in the black, and there are a lot of buildings that don’t have that, so it’s a great achievement,’ said A.J. Boleski, the arena’s general manager.”
The Wichita Eagle opinion page hasn’t been helpful, with Rhonda Holman opining with thoughts like this: “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.” (For some years, the county paid to create a large “check” for publicity purposes.)
That followed her op-ed from a year before, when she wrote: “And, of course, Intrust Bank Arena has the uncommon advantage among public facilities of having already been paid for, via a 30-month, 1 percent sales tax approved by voters in 2004 that actually went away as scheduled.” That thinking, of course, ignores the economic reality of depreciation.
In 2018, the Wichita Eagle reported, based on partial-year results: “Intrust Bank Arena remains profitable but is reporting a 20 percent drop in income this year, despite a bump from the NCAA March Madness basketball tournament. Net income for the first three quarters of this year was about $556,000. That’s down from just shy of $700,000 last year, according to a report to the Sedgwick County Commission.” 5 This use of “profitable” is based only on the special revenue-sharing agreement, not generally accepted accounting principles.
Even our city’s business press — which ought to know better — writes headlines like Intrust Bank Arena tops $1.1M in net income for 2015 without mentioning depreciation expense or explaining the non-conforming accounting methods used to derive this number.
All of these examples are deficient in an important way: They contribute confusion to the search for truthful accounting of the arena’s finances. Recognizing depreciation expense is vital to understanding profit or loss, we’re not doing that.
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Notes
The Operations of INTRUST Bank Arena, as Managed by SMG. Independent Auditor’s Report and Special-Purpose Financial Statements. December 31, 2018. Available here. ↩
We should be wary of government planning in general. But when those who have been managing and planning the foundering Wichita-area economy want to step up their management of resources, we risk compounding our problems.
As announced by the City of Wichita, “In response to recent recommendations from Project Wichita and the Century II Citizens Advisory Committee, community organizations and their leadership are stepping forward to take the next step to create a comprehensive master plan and vision that connects projects and both banks of the Arkansas River.”
The city says these organizations will be involved:
We should note that these organizations have been responsible for developing the Wichita-area economy for many years. Despite recent developments like Cargill and Spirit Aerosystems, the Wichita economy has performed below the nation. While improving, our economic growth is perhaps half the national rate, and just two years ago Wichita lost jobs and population, and economic output fell.
Thus, the question is this: Why these organizations?
Then, recent behavior by the city, specifically surrounding the new ballpark, has resulted in a loss of credibility. Few seem happy with the city’s conduct. To this day, we still do not know the identities of the partners except for one.
In the future, can we trust the city and its partners are telling us the truth, and the whole truth?
Planning seems like a good thing. But O’Toole tells us the problem with government plans: “Everybody plans. But private plans are flexible, and we happily change them when new information arises. In contrast, special interest groups ensure that the government plans benefiting them do not change — no matter how costly.”
He continues: “Like any other organization, government agencies need to plan their budgets and short-term projects. But they fail when they write comprehensive plans (which try to account for all side effects), long-range plans (two to 50 years or more), or plans that attempt to control other people’s land and resources. Many plans try to do all three.”
Other problems with government planning as identified by O’Toole (and many others):
Planners have no better insight into the future than anyone else
Planners will not pay the costs they impose on other people
Unlike planners, markets can cope with complexity
Some will argue that the organizations listed above are not government entities and shouldn’t exhibit the problems inherent with government planning. But their plans will undoubtedly need to be approved by, and enforced by, government.
Further, some of these organizations are funded substantially or nearly entirely by government, are in favor of more government (such as higher taxation and regulation), and campaign vigorously for candidates who support more taxes and planning.
Following, from Randal O’Toole as published in 2007.
Government Plans Don’t Work
By Randal O’Toole
Unlike planners, markets can cope with complexity and change.
After more than 30 years of reviewing government plans, including forest plans, park plans, watershed plans, wildlife plans, energy plans, urban plans, and transportation plans, I’ve concluded that government planning almost always does more harm than good.
Most government plans are so full of fabrications and unsupportable assumptions that they aren’t worth the paper they are printed on, much less the millions of dollars taxpayers spend to have them written. Federal, state, and local governments should repeal planning laws and shut down planning offices.
Everybody plans. But private plans are flexible, and we happily change them when new information arises. In contrast, special interest groups ensure that the government plans benefiting them do not change — no matter how costly.
Like any other organization, government agencies need to plan their budgets and short-term projects. But they fail when they write comprehensive plans (which try to account for all side effects), long-range plans (two to 50 years or more), or plans that attempt to control other people’s land and resources. Many plans try to do all three.
Comprehensive plans fail because forests, watersheds, and cities are simply too complicated for anyone to understand. Chaos science reveals that very tiny differences in initial conditions can lead to huge differences in outcomes — that’s why megaprojects such as Boston’s Big Dig go so far over budget.
Long-range plans fail because planners have no better insight into the future than anyone else, so their plans will be as wrong as their predictions are.
Planning of other people’s land and resources fails because planners will not pay the costs they impose on other people, so they have no incentive to find the best answers.
Most of the nation’s 32,000 professional planners graduated from schools that are closely affiliated with colleges of architecture, giving them an undue faith in design. This means many plans put enormous efforts into trying to control urban design while they neglect other tools that could solve social problems at a much lower cost.
For example, planners propose to reduce automotive air pollution by increasing population densities to reduce driving. Yet the nation’s densest urban area, Los Angeles, which is seven times as dense as the least dense areas, has only 8 percent less commuting by auto. In contrast, technological improvements over the past 40 years, which planners often ignore, have reduced the pollution caused by some cars by 99 percent.
Some of the worst plans today are so-called growth-management plans prepared by states and metropolitan areas. They try to control who gets to develop their land and exactly what those developments should look like, including their population densities and mixtures of residential, retail, commercial, and other uses. “The most effective plans are drawn with such precision that only the architectural detail is left to future designers,” says a popular planning book.
About a dozen states require or encourage urban areas to write such plans. Those states have some of the nation’s least affordable housing, while most states and regions that haven’t written such plans mostly have very affordable housing. The reason is simple: planning limits the supply of new housing, which drives up the price of all housing and leads to housing bubbles.
In states with growth-management laws, median housing prices in 2006 were typically 4 to 8 times median family incomes. In most states without such laws, median home prices are only 2 to 3 times median family incomes.
Few people realize that the recent housing bubble, which affected mainly regions with growth-management planning, was caused by planners trying to socially engineer cities. Yet it has done little to protect open space, reduce driving, or do any of the other things promised.
Politicians use government planning to allocate scarce resources on a large scale. Instead, they should make sure that markets — based on prices, incentives, and property rights — work.
Private ownership of wildlife could save endangered species such as the black-footed ferret, North America’s most-endangered mammal. Variably priced toll roads have helped reduce congestion. Pollution markets do far more to clean the air than exhortations to drive less. Giving people freedom to use their property, and ensuring only that their use does not harm others, will keep housing affordable.
Unlike planners, markets can cope with complexity. Futures markets cushion the results of unexpected changes. Markets do not preclude government ownership, but the best-managed government programs are funded out of user fees that effectively make government managers act like private owners. Rather than passing the buck by turning sticky problems over to government planners, policymakers should make sure markets give people what they want.
The City of Wichita plans subsidized development of a sports facility as an economic driver. Originally published in July 2017.
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 examples of Waterwalk, Kenmar,and 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. Two 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 baseball 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.”
Professional Sports as Catalysts for Metropolitan Economic Development
Robert A. Baade, Journal of Urban Affairs, 1996. Link.
“To attract or retain a team, cities are offering staggering financial support and rationalize their largesse on economic grounds. Do professional sports increase income and create jobs in amounts that justify the behavior of cities? The evidence detailed in this paper fails to support such a rationale. The primary beneficiaries of subsidies are the owners and players, not the taxpaying public.”
“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 City of Wichita says it has safeguards built in to the proposed baseball park land development deal.
This week the Wichita City Council will consider a land development deal for land surrounding the new ballpark on the west bank of the Arkansas River downtown. The city assures us that there are safeguards in the deal that protect Wichitans.
We need safeguards. The city is borrowing to pay for the project, and the city expects to collect a lot of money from surrounding development, necessary to pay off the borrowed money. 1
To spur this development, the city plans to sell (about) 4.25 acres of land to the development team for $1 per acre. If the developer does not perform by building commercial space according to a schedule, the city can buy back land at that same price.
This — the buyback of the land — is promoted as security for the city. There are protections, the city tells us. The city also acknowledges that some past deals like WaterWalk have not had the type of protections built in to the ballpark deal.
But really: What is the value of the safeguards in the ballpark land deal?
If the ballpark developers fail (I’d like to name them, but we don’t know anything about them except for one person 2), the city can get its land back. But what then? Who pays the bonds? (Some of the borrowing is in the form of STAR bonds, which are not obligations of the city. But if these bonds went unpaid, it would be a very large and bad blot on the city’s reputation.)
The city says it would hurry to find another developer. But finding reputable developers willing to take over a failed effort might be difficult. Principal and interest must be paid during this time.
This doesn’t seem like much protection.
Walk away from WaterWalk
Critics of city development projects point to WaterWalk as an example of a failed downtown development. Some $41 million of city funds were spent there with few positive results, and with the recent closing of the Gander Mountain store, fortunes are not looking up.
But WaterWalk is different, the city says. In a recent social media town hall, the city stated, “Waterwalk wasn’t the deal we put together nor did it have the safeguards of this project. Waterwalk is not a city owned development.” 3
I guess it depends on the meaning of “we.” True, most city officials weren’t in office at the time of the WaterWalk deal. Accountability belongs to others is the attitude of Wichita Mayor Jeff Longwell and others.
But most of the people of Wichita are still here, and still waiting for the city’s promises to be realized.
While the city criticizes the WaterWalk deal for not having safeguards, the protections built in the baseball deal aren’t very strong. And while the city says “WaterWalk is not a city owned development,” neither is the ballpark land development deal. Remember, the city is selling the land.
The protections
In the Wichita city council agenda packet for March 19, 2019, we find this in item IV-1:
City grants the Developer an initial, exclusive right to purchase the Private Development Site for the development of the hospitality, commercial, retail, office and residential uses, as contemplated herein, for $1.00 an acre. This opportunity extends for ninety (90) days after the start of the first full season of the team’s residency in Wichita.
The next point requires the developer to exercise the purchase rights and meet a series of benchmarks, with a first phase of 30,000 square feet of development starting in 2021, with a second phase of 20,000 square starting the following year, and another 15,000 square feet after that.
Then the purported safeguards:
If the Developer fails to Commence Construction on any Phase by the appointed time or fails to complete construction of any Phase of development within the appointed time. The Developer can forestall a default by providing personal guarantees and making the CID and TIF shortfall payments. The Developer will also forfeit any right to any future phase of development. The City may repurchase any unaffected phase property for the original sale price. If the Developer fails to make the shortfall payments, the City may collect on the personal guarantees and exercise all legal remedies.
There is an escape clause:
Developer may provide personal guarantees reasonably satisfactory to the City as security that Developer will make the City whole for the lost revenue stream required to satisfy the state and local STAR bond repayments, CID and TIF District financing pro forma on an annual basis (Shortfall Payments).
As for accepting personal guarantees, we don’t know the identities of the developers, except for majority owner Lou Schwechheimer. 4 We don’t know the size of the share he owns, except the city tells us it is over 50 percent.
In this short video, John Todd tells us why the city is not acting in the best interest of citizens regarding the land development deal near the new Wichita ballpark. View below, or click here to view at YouTube.
The City of Wichita tells us it has thoroughly vetted the majority owner of the new Wichita baseball team.
It appears that the owners of the New Orleans Baby Cakes baseball team talked with the City of Wichita before the team received permission from Minor League Baseball. The Wichita Eagle reports: “A Minor League Baseball team may have violated league rules by talking to Wichita Mayor Jeff Longwell before seeking approval from the league, according to a letter from the league’s attorney.” 1
While the letter doesn’t name the New Orleans team, the Eagle reported in the same story, “A city official confirmed Wednesday night that Longwell was communicating with the Baby Cakes.”
This revelation is relevant for a few reasons.
First, if we look at the timing of this letter, the city — at least Wichita Mayor Jeff Longwell — knew of this transgression over a year ago. 2
These rules of minor league baseball were considered so sacred that the mayor used them as a pretext for conducting negotiations in secret, particularly withholding disclosure of a side land development deal. (Although the city did disclose, at least somewhat. 3) Apparently, these rules didn’t mean much to the majority owner of the New Orleans team — someone the city says it has “thoroughly vetted.” Now we know that Schwechheimer is alleged to have these rules regarding moving his team to Wichita.
By the way, the rules of minor league baseball that the city shared applied to the team, not the city. The letter the mayor received warned the team could be fined, not the city.
When the city was notified that the team had broken the rules, didn’t this raise a warning flag?
Second, the city says it vets its partners thoroughly, including baseball team majority owner Lou Schwechheimer. But in this case, we don’t know the identities of all the partners. All we know is that one Lou Schwechheimer is a majority owner. When asked what proportion of the team he owns, the city replied, “Over 50%.” Either the city does not know the number, or is not willing to tell us. 4 There’s a big difference between owning 51 percent of something and, say, 95 percent.
The team owners are breaking their stadium lease in New Orleans in order to move to Wichita. There is much press coverage of the owners making grand promises to the people there, only to start planning to move the team within two years. 5
Now the majority owner makes grand promises to Wichita. But the city says he’s been “thoroughly vetted,” and relies on long-term agreements with him.
Why won’t Schwechheimer reveal the identities of his partners or the percent of the team he owns? Why is the city willing to enter expensive and long-term agreements without knowing this?
Part of the agreement with the new Wichita baseball team is, apparently, unknown.
In the September 2018 agreement between the City of Wichita and the owners of the new Wichita baseball team, there is this regarding an air travel fund: 1
Section 10.6 Emergency Air Travel Fund. The City and the Team acknowledge and agree that, as a condition of the Pacific Coast League and Minor League Baseball approving the relocation of the Team to Wichita, the City and the Team must establish a fund (the “Travel Fund”) to be used to address some of the concerns raised about accessibility, frequency and ease of travel into and out of Wichita. Each of the City and the Team will be required to make an initial deposit of $100,000 into the Travel Fund, for a total of $200,000, and each Party will be required to replenish the Travel Fund each year in case of claims made against the Travel Fund during the prior year. The terms and conditions for the payout of funds and other issues related to the Travel Fund will be as set forth in a separate agreement among the City, the Team and the Pacific Coast League.
In October the city produced a formal agreement (marked “execution copy”) between the city and the baseball team owners. That document references a travel fund in a general way, saying it is attached as exhibit D. 2
But exhibit D is blank.
I’ve asked the city for the travel fund agreement. It hasn’t been supplied.
We can easily see that Pacific Coast League baseball team owners might seek to make maximum use of the air travel fund. And why not? To them, it’s just asking for free money.
I’m sure the mayor and city officials will tell us to trust them and the team owners. They may cite the term “reasonable.” But this is a mayor that withheld the fact of a side land deal until recently, and now expresses regret for doing so.
This is one more action by the city that breeds distrust. Until we know more, we need to delay any further decisions.
And: Wasn’t years of subsidies and a shiny new airport supposed to fix the problems with air travel in Wichita?
—
Notes
City of Wichita agenda packet for September 11, 2018, item IV-3 ↩
“17.9 Emergency Air Travel Fund. The City and the Team acknowledge and agree that, as a condition of the PCL and MiLB approving the relocation of the Team to Wichita, the City and the Team must establish a fund (the “Travel Fund”) to be used to respond to reasonable claims presented by other teams in the PCL relating to accessibility, frequency and ease of travel into and out of Wichita. The Emergency Air Travel Fund Agreement is attached hereto as Exhibit D.” City of Wichita. BALLPARK FACILITY USE AND MANAGEMENT AGREEMENT BETWEEN THE CITY OF WICHITA, KANSAS AND YES2NO, LLC, A MASSACHUETTS LIMITED LIABILITY COMPANY Authorized to do business in Kansas. October 23, 2018. Available at https://www.wichita.gov/Stadium/Documents/Facility%20Use%20%20Management%20Agreement%20-%20Final.pdf. ↩
In a presentation, Wichita economic development officials ignore the cost of borrowing money.
In a presentation to the Wichita City Council on March 5, 2019, the council was shown a pro forma cash flow statement regarding the new baseball stadium.
Presentation to Wichita city council. Click for larger.The conclusion reached by city officials was: “The $38M equates to over 50% of the $75M stadium debt repayment.” 1
$38M, or $38,000,000 refers to the sum of the amounts the city expects to receive from these sources:
Incremental sales tax (used to pay STAR bonds)
TIF revenue (incremental property tax revenue)
CID (the extra sales tax customers will pay)
Naming rights
Management fee (the rent the new team plays the city)
The pro forma statement shows these cash flows starting in 2020 and continuing through 2042.
$75M, or $75,000,000, refers to the cost of the baseball stadium. (In this illustration the city has not included the $6,000,000 the city plans to borrow to pay for the pedestrian bridge and riverfront improvements.)
What’s missing? Interest on borrowed money.
If the presentation said, “The $38M equates to over 50% of the $75M stadium debt principal repayment,” that would be correct. But to tell the council that it costs just $75,000,000 to repay the stadium debt ignores the fact that the city is borrowing this money.
There will be a lot of interest to pay. We don’t know how much, as the bonds have not been sold, except for the STAR bonds. The city has planned to borrow $42,140,000 in STAR bonds. In the disclosure for these bonds, the interest payments alone total $24,647,850. In some years the interest payment alone is $1,828,556. 2
Citizens should ask the city what will be the total cost of repaying the stadium debt, and not settle for answers that ignore millions of dollars in interest.
Municipal Securities Rulemaking Board. CITY OF WICHITA, KANSAS SALES TAX SPECIAL OBLIGATION REVENUE BONDS (RIVER DISTRICT STADIUM STAR BOND PROJECT), SERIES 2018 (KS). Available at https://emma.msrb.org/IssueView/Details/ER387382. ↩
A bond disclosure document anticipated a development agreement for land surrounding the new Wichita ballpark.
When offering bonds for sale, issuers file a disclosure document that is often full of interesting detail. In the disclosure for the STAR bonds for the new Wichita ballpark, we learn this:
The City and the owner of the minor league team are anticipated to enter into a development agreement whereby the owner has the ability to develop approximately 15 acres of property surrounding the stadium. The development agreement is anticipated to require development to commence within 18 months of completion of the stadium and include the development of a hotel, retail spaces, restaurants and bars to complement the stadium and surrounding areas.
This is from a documente dated November 1, 2018 and filed with the Municipal Securities Rulemaking Board on November 16, 2018. This seems to contradict a claim made by Wichita Mayor Jeff Longwell and other city officials that the city was barred from disclosing the fact of land development negotiations until last week. The bond disclosure is silent regarding terms of an agreement.
$42,140,000
City of Wichita, Kansas
Sales Tax Special Obligation Revenue Bonds
(River District Stadium Star Bond Project)
Series 2018
Official Statement dated November 1, 2018
STAR Bonds Overview
(page 1)
“Sales tax and revenue” bonds (“STAR Bonds”) are authorized to be issued by the City pursuant to K.S.A. 12-17,160. et seq., as amended (the “STAR Bond Act”), The STAR Bond Act provides a form of tax increment financing that enables the issuance of bonds payable from certain State and local sales and compensating use tax revenues generated from STAR Bond projects constructed within a STAR Bond district.
To implement STAR Bond financing, a local government must adopt a resolution that specifies a proposed STAR Bond project district’s boundaries and describes the overall district plan, hold a public hearing on the district and the plan, and pass an ordinance that establishes the STAR Bond project district.
There may be one or more proposed STAR Bond projects within a STAR Bond project district. As with the STAR Bond project district, the local government must adopt a resolution, hold a hearing, and pass an ordinance that establishes each such STAR Bond project. Each project also must have a project plan that includes a description and map of the project area, a plan for relocating current residents and property owners, a detailed description of the proposed buildings and facilities and a feasibility study showing that the project will have a significant economic impact, generate enough tax revenues to pay off STAR Bonds proposed to be issued to finance the project, and not adversely affect existing businesses or other STAR Bonds that have already been issued. STAR Bonds can be used to pay for certain costs of a STAR Bond project, including property acquisition, site preparation, infrastructure improvements, certain hard construction costs, bond issuance costs, bond financing costs, loan financing costs, and related soft costs.
The District and the Project
(page 2)
In 2007, the City adopted the River District STAR Bond Project Plan (the “Original Project Plan”) for an approximately 210 acre tract known as the East Bank Redevelopment District (the “Original District” or the “Phase I Project Area”). The Original Project Plan anticipated a $155.8 million redevelopment project along the banks of the Arkansas River (the “River”) through the City’s Central Business District.
In December 2016, the City adopted an ordinance to expand the boundaries of the Original District by adding approximately 64 acres located on the west bank of the River north from Kellogg Avenue to approximately 1st Street (the “Additional Property.” the “West Bank Project Area” or the “Phase II Project Area”). The West Bank Project Area includes commercial properties, the City’s Lawrence-Dumont Baseball Stadium, the Wichita Ice Center and the Wichita Public Library’s Advanced Learning Library. The Original District, as expanded by the Additional Property, is referred to herein as the “STAR Bond District” or the “District.”
The West Bank Project Area was added to the Original District to fund additional riverbank improvements between Douglas Avenue and the Kellogg Avenue Bridge, to install a pedestrian bridge to connect the performing arts area on the East Bank with the sports and entertainment area on the West Bank, to construct a multi-sport athletic facility that will replace the existing Lawrence-Dumont Baseball Stadium on the same site and to construct a baseball-themed spoils museum in conjunction with the multi-sport athletic facility. On December 20, 2016. the Secretary of Commerce of the State of Kansas (the “Secretary”) determined that the District, as expanded by the Additional Property, is an “eligible area” within the meaning of the STAR Bond Act.
On January 3, 2017, the City adopted an ordinance to approve the Project Plan Amendment to the STAR Project Plan, dated as of December 2016 (the “STAR Bond Project Plan Amendment”). The STAR Bond Project Plan Amendment included a pedestrian bridge across the River, a baseball/sports museum, riverbank improvements and design and site work related to the baseball stadium. Major components of the STAR Bond Project Plan Amendment and the Phase II Project Plan (the “2018 Projects”) include the following:
(i) the replacement of the City’s existing Lawrence-Dumont Baseball Stadium expected to be the home a Triple-A minor league affiliate of the Miami Marlins;
(ii) a museum and home of the National Baseball Congress; and
(iii) a pedestrian bridge across the River.
(page 5)
The proceeds of the Series 2018 Bonds, along with other available fluids, will be used to (i) pay a portion of the costs of the 2018 Projects; (ii) fond a deposit to the Capitalized Interest Fund established under the Indenture for the Series 2018 Bonds to be used to pay interest on the Series 2018 Bonds through September 1, 2020; and (iii) pay certain costs related to the issuance of the Series 2018 Bonds.
(Page 8)
THE DISTRICT AND THE 2018 PROJECTS
The Original STAR Bond District and the Original Project
In 2007, the City adopted the Original Project Plan for the Original District. The Original Project Plan anticipated a $155.8 million redevelopment project along the banks of the River through the City’s Central Business District. The first phase of the project plan extended from the First/Second Street Bridge to the Central Avenue (Little Arkansas) and Seneca Street (Big Arkansas) bridges. It included upgrades to the area surrounding the Keeper of the Plains statue at the confluence of the rivers. Additional construction included a portion of the South Riverbank to the west of Exploration Place, two cable-stayed pedestrian bridges linking the Keeper of the Plains monument to the outer banks of each river, and work along the East Riverbank from Central to First Street. The first phase also included construction of the Fountains at WaterWalk, a fountain attraction incorporating programmed water jets linked to lights and music.
The East Riverbank Project was completed in 2011 as part of the Drury Plaza Hotel Broadview redevelopment. The $2,500,000 STAR revenue financed project involved extensive East Riverbank improvements north of Douglas Avenue. This project phase supported the $29 million Drury Plaza Hotel redevelopment project. Improvements included a venue space, pedestrian access from Waco Street and river overlook areas.
The recently completed West Bank Apartments Project, located within the boundaries of the Original District, included a West Riverbank promenade between Second Street and Douglas Avenue and the Chisholm Trail McLean Memorial Fountain area, riverbank improvements with landscaping, fountains and walking/bike paths along the River. These improvements are associated with a tax increment financing and community improvement district development that includes an apartment complex, parking garage and a boat and bike rental facility. STAR Bonds financed $4,750,000 of West Riverbank improvements associated with the West Bank Apartments Project.
The Expanded STAR Bond District
In December 2016, the City adopted an ordinance to expanded the boundaries of the Original District by adding approximately 64 acres located on the west bank of the River north from Kellogg Avenue to approximately 1st Street (the “Additional Property,” the “West Bank Project Area” or the “Phase II Project Area”). The West Bank Project Area includes commercial properties, the City’s Lawrence-Dumont Baseball Stadium the Wichita Ice Center and the Wichita Public Library’s Advanced Learning Library. The Original District, as expanded by the Additional Property, is referred to herein as the “STAR Bond District” or the “District.” A map depicting the boundaries of the District, is set forth above.
The West Bank Project Area was added to the Original District to fund additional riverbank improvements between Douglas Avenue and the Kellogg Avenue Bridge, to install a pedestrian bridge to connect the performing arts area on the East Bank with the sports and entertainment area on the West Bank, and to construct a baseball-themed sports museum on the site of the Lawrence-Dumont Baseball Stadium. On December 20, 2016, the Secretary of Commerce of the State of Kansas (the “Secretary”) determined that the District, as expanded by the Additional Properly, is an “eligible area” within the meaning the of the STAR Bond Act.
The 2018 Projects
On January 3, 2017, the City adopted an ordinance adopting the STAR Bond Project Plan Amendment which provided for additional development within the District. On March 20, 2017, the Secretary took the following actions with respect to the District and the STAR Bond Project Plan Amendment:
(1) found and determined that the District, as expanded, is a major commercial entertainment and tourism area and an “eligible area” within the meaning of the STAR Bond Act;
(2) approved and designated improvements to the West Bank of the Arkansas River and enhanced public improvements within the District as part of a “STAR bond project” within the meaning of the STAR Bond Act; and
(3) approved the issuance of up to $19,500,000 (exclusive of approved financing costs) in STAR Bond financing for the improvements and amenities related to the STAR Bond Project Plan Amendment.
On May 2, 2017, the City adopted an ordinance adopting the River District Phase II STAR Bond Project Plan (the “Phase II Project Plan”) which provides for the redevelopment of the West Bank Project Area. On April 30, 2018, the Secretary took the following actions with respect to the District and the Phase II Project Plan:
(1) found and determined that the District, as expanded, includes a “major multi-sport athletic facilities” and museum components and is an “eligible area” within the meaning of the STAR Bond Act;
(2) approved and designated improvements to the East Bank of the Arkansas River and enhanced public improvements within the District as part of a “STAR bond project” within the meaning of the STAR Bond Act; and
(3) approved the issuance of up to $20,500,000 (exclusive of approved financing costs) in STAR Bond financing for the improvements and amenities related to the Phase II Project Plan.
Major components of the Phase II Project Plan (also known as the “2018 Project”) include the following:
(i) the replacement of the City’s existing Lawrence-Dumont Baseball Stadium which is expected to be the home a Triple-A minor league affiliate of the Miami Marlins;
(ii) a museum and home of the National Baseball Congress; and
(iii) a pedestrian bridge across the River.
The estimated overall plan of finance for the 2018 Projects includes the use of fluids provided from other available City fluids or borrowings, including proceeds of general obligation bonds and revenues from tax increment financing districts and community improvement districts, which proceeds are expected to be available in the first half of 2019. The following table provides a summary of the sources and uses of such funds:
Sources of Funds
STAR Bonds: 40,000,000.00
Available City Funds & Financing: 43,000,000.00
Total Sources: 83,000,000.00
Uses of Funds
Stadium & Museum: 75,000,000.00
Pedestrian Bridge: 3,000,000.00
Riverbank Improvements: 3,000,000.00
Parking & Infrastructure: 2,000,000.00
Total Uses: 83,000,000.00
The existing Lawrence-Dumont Baseball Stadium was constructed in 1934 as part of the Works Progress Administration during the Great Depression. The stadium previously served as the home to the Wichita Wranglers (Class AA Texas League) through the 2007 baseball season. As part of the plans to continue to redevelop the City’s downtown area, the City has estimated the demolition of the current stadium by year end 2018 and completion of the new stadium by March 2020. The new facility is estimated to include 6,500 to 7,000 fixed seats, with group areas and other spaces bringing total capacity to around 10,000. The stadium will serve as the home for a to-be-named Triple A minor league affiliate of the Miami Marlins and be used to hold concerts and various high school and collegiate sporting events.
The City and the owner of the minor league team are anticipated to enter into a development agreement whereby the owner has the ability to develop approximately 15 acres of property surrounding the stadium. The development agreement is anticipated to require development to commence within 18 months of completion of the stadium and include the development of a hotel, retail spaces, restaurants and bars to complement the stadium and surrounding areas.
Other Anticipated Development in the District
Anticipated future phases of development expected to occur within the West Bank Project Area include: (i) completion of the west bank corridor improvements from Douglas Avenue south to Kellogg with an estimated $5 million in STAR Bond funded improvements for a plaza and riverbank amenities designed to complement the stadium and surrounding Delano neighborhood; (2) an East Bank Catalyst Site north of the Broadview Hotel redevelopment site and across the River from the West Bank Apartments Project (as described above), with an anticipated $40 million mixed-use development along the river that complements both the River corridor and adjacent Broadview Hotel and includes an estimated $4 million in STAR Bond financed plaza and River bank amenities; and (3) development of the area referred to as the Upper Reach, extending from the Seneca Street Bridge to Sim Park on the opposite side of the River.
The City and EPC Real Estate Group. LLC (the “Delano Catalyst Site Developer”) have entered into a Development Agreement relating to certain property within the West Bank Project Area, consisting to the property south and east of the Wichita Public Library’s Advanced Learning Library. Pursuant to the Development Agreement, the Delano Catalyst Site Developer has agreed to develop the property to include the following:
a public greenway/gathering area on the property;
an apartment complex consisting of a minimum of 180 apartment units;
a hotel consisting of a minimum of 90 guest rooms;
a minimum of 114 parking spaces available to the public; and
a minimum of 5,000 square feet of Class A commercial space.
The Delano Catalyst Site Developer has agreed to meet certain project milestones in connection with the development of the property, including full project completion by October 1, 2020.
Projected Incremental Tax Revenues
(page 14)
Click here to view Wichita ballpark STAR bonds series 2018 projected incremental tax revenues.pdf
(page 15)
SOURCES AND USES OF FUNDS
The following sets forth the estimated sources and uses of fluids relating to the proceeds of the Series 2018 Bonds:
Sources of Funds
Series 2018 Bond Principal: 42,140,000.00
Net Original Issue Premium: 1,733,967.20
Total Sources: 43,873,967.20
Uses of Funds
Deposit to Project Fund: 40,000,000.00
Deposit to Capitalized Interest Fund: 3,276,163.30
Costs of Issuance(1): 597,803.90
Total Uses: 43,873,967.20
(1) Includes underwriters’ discount (see “UNDERWRITING” herein) and other costs of issuance related to the Series 2018 Bonds.
Debt Service Requirements
(page 16)
Click here to view Wichita ballpark STAR bonds series 2018 debt service requirements.pdf
In the agenda for March 5, 2019, as part of item V-3, titled “Private Development Agreement with Wichita Riverfront LP (District IV),” there is a development agreement between the city and a group wanting to develop city-owned land near the new baseball stadium. Section 6.03 of the development agreement holds this surprise:
“The 1% City sales tax has been approved at an election, and the City agrees that the City sales tax revenues generated within the STAR Bond District will be committed to pay the principal and interest of the STAR Bonds.” (emphasis added)
It turns out this is a mistake. The city’s chief economic development official told me, “When we draft new agreements, we often cut and paste language from previous agreements to help build a base document.”
This language has been removed from the agreement, he also said, as it has “no purpose in this agreement.”
This still leaves a few questions:
First, from which previous agreement was this copied? Which agreement (or potential agreement) contained a statement that city voters approved a city sales tax? Which election?
Second, what if the council had passed this agreement with this language included?
Third, this is evidence of extreme carelessness. We’ve been told that this development agreement has been in negotiations for several months. Yet, this mistake somehow survived and almost became part of a binding document.
The city of Wichita has included anti-poaching clauses in development agreements to protect non-subsidized landlords, but the agreements are without teeth.
The Wichita City Council is considering a development agreement between the city and a group wanting to develop city-owned land near the new baseball stadium. In the agenda for March 5, 2019, as part of item V-3, titled “Private Development Agreement with Wichita Riverfront LP (District IV),” there is this in the city’s “analysis” section:
For and in consideration of the Purchase Rights granted Developer herein, from the Effective Date of this Agreement for a period of ten (10) years after the Completion of Construction for the Phase One Development, Developer and each of its members hereby agrees and consents that it shall not, directly or indirectly, market, solicit, promote or attempt to lease commercial space in the Private Development to then-current tenants of properties located within a distance of two (2) miles extending from the outside boundary of the Private Development Site. (emphasis added)
While the city doesn’t provide a reason for this provision of the agreement, we might call it the “anti-poaching” clause. Since the city is giving land to the ballpark developers at (essentially) zero cost, that gives them an advantage over other developers who have not received such subsidy. The ballpark developers could use that cost advantage to lure (poach) tenants from nearby locations. Those landlords who lose tenants might feel they have been discriminated against. They’d be correct.
While this anti-poaching policy seems reasonable, the city gives itself an escape hatch. In the actual agreement between the city and the ballpark developer we find that the developer shall not poach without “the City’s providing written consent waiving this restriction with respect to such Potential Tenant.” 1
In other words, the city can waive the anti-poaching clause. There is no need for anyone to give a reason why a waiver is necessary. The document is silent as to whether a waiver requires city council approval.
This isn’t the first time the city has included an anti-poaching clause with a waiver provision. On December 19, 2017 the city council considered a development agreement for the Spaghetti Works development near Naftzger Park in downtown. The city’s analysis described an anti-poaching clause, but the actual development agreement lets the city waive the clause. In this case, all the city must do is fail to object to a poached tenant, and the clause is waived. 2
—
Notes
Development agreement, section 3.10: “Business Restriction Radius. For and in consideration of the Purchase Rights granted Developer herein, from the Effective Date of this Agreement for a period of ten (10) years after the Completion of Construction for the Phase One Development, Developer and each of its members hereby agrees and consents that it shall not, directly or indirectly, market, solicit, promote or attempt to lease commercial space in the Private Development to then-current tenants of properties located within a distance of two (2) miles extending from the outside boundary of the Private Development Site (“Business Restriction Radius”) as shown on Exhibit L, to avoid and/or minimize material economic impact to the established businesses within the Business Restriction Radius without: (i) the Developer’s providing to the City and the then-current landlord of such potential tenant (“Potential Tenant”) sixty (60) days’ prior written notice of the intent to enter into lease negotiations with such Potential Tenant within the Business Restriction Radius, and (ii) the City’s providing written consent waiving this restriction with respect to such Potential Tenant. This restriction shall not apply to a Potential Tenant if such Potential Tenant (i) has multiple locations within the City of Wichita at the time of such solicitation, or (ii) such Potential Tenant is considering opening up a second location within the Private Development Site in addition to maintaining its current location within the Business Restriction Radius.” ↩
City of Wichita, agenda packet for December 19, 2017, agenda item IV-6, “Petition to Approve a Community Improvement District and approval of a Development Agreement for Spaghetti Works (District I).” From the city’s analysis” “The agreement includes a retail relocation restriction for the first three years following the Certificate of Completion for Phases 1 and 2. The boundaries for the relocation restriction are 1st Street on the north, Waterman Street on the south, Broadway Avenue on the west and Washington Avenue on the east.”
From the development agreement: “Section 4.14. Relocation Restrictions. For a period of three years following the City’s acceptance of a Certificate of Full Completion of Phases 1 and 2 of the SW Project, the Developer or approved assignee shall present to the City a written description of potential retailer or restaurant tenants to be located within Phases 1 and 2 of the SW Project which are relocating from a site within the area bounded by 1st Street on the North, Waterman Street on the South, Broadway Street on the West, and Washington Avenue on the East (the “Restricted Area”). Such description shall be presented to the City within thirty (30) days prior to the date when the Developer or approved assignee expect to enter into any legal obligation for the lease of such retail or restaurant tenant space. The City shall have the absolute right to refuse any such prospective tenant presented by the Developer. If the City Representative does not provide a written objection to Developer within ten (10) business days of presentment, such non-response shall constitute a waiver of any objection to Developer’s proposed sale or lease. The Developers further agree to obtain a covenant from any assignee or purchaser of an ownership interest in the SW Project to abide by the terms of this Section 4.14.” (emphasis added) ↩
A surprise deal that has been withheld from citizens will be considered by the Wichita City Council this week.
Wichitans were probably surprised to learn Sunday that the city plans to sell land near the new baseball stadium to the owners of the new baseball Wichita team.
Surprised for several reasons: First, while the city completed an agreement with the new team last year, the land sale was not disclosed to the public. There appears to be no prior public mention of this.
Second, the city plans to sell land for $1 per acre.
Third: While the Wichita Eagle reported this story Sunday 1 We might have known as early as Friday, except that city council agendas were not available due to a website problem. The website was fixed Monday afternoon.
Here’s what the agenda packet holds for item V-3, titled “Private Development Agreement with Wichita Riverfront LP (District IV).”
“As part of the City’s effort to attract affiliated baseball to Wichita and secure development activity to help pay for the stadium STAR and TIF bonds, the City extended the invitation for interested team ownerships to have development opportunities surrounding the stadium. The New Orleans’s team ownership did express that as a requirement for their interest in Wichita they required development rights around the stadium.”
This is the first time the city has revealed that development opportunities surrounding the stadium were a requirement of the baseball team deal.
From the agenda: “City grants the Developer exclusive right to purchase the Private Development Site for the development of the hospitality, commercial, retail, office and residential uses, as contemplated herein, for $1.00 an acre.”
How much land at one dollar per acre? Earlier, the agenda holds this: “The City owns approximately 24 acres at the former Lawrence Dumont Stadium site. After securing the final footprint of the stadium site, adjacent streets, infrastructure and riverfront enhancements, it is estimated that the remaining property available for private development will be 4.25 acres.” (The Eagle article reported the sale would be 24 acres, but the agenda contradicts that.)
It is troubling that the city has not been forthright in sharing this with us before now. Besides the agenda, the Eagle reported this:
“It goes back to the partnership that we have worked out with the team,” said Scot Rigby, assistant city manager and director of development services, whose department came up with the agreement.
“That’s where we struck that agreement on the value of the ground. For the city, we’ve already owned that property,” he said. “If we didn’t do anything with it, it would be undeveloped property. So the value for us is to get it in development as quickly as possible.”
Also, from the Eagle:
Having the baseball team expand its operations from baseball to real estate along the river has been part of the plan since talks started between the team owners and city officials about three years ago, and it played a major role in attracting the team to Wichita, officials with the city and the team said.
“We needed a team that played the level of baseball that was attractive for the community and important in terms of affiliated baseball at the Triple-A level. But we also wanted a team that could deliver on the development,” Layton said.
Why didn’t the city feel it could share that with us at the time the deal was struck for the team to move to Wichita?
There’s also this. We don’t know much about the ownership team, led by Schwechheimer. At least some in New Orleans weren’t happy with his plans to move the team from there to Wichita: “Relocating the Baby Cakes to Wichita, a city with one-third the market of New Orleans would be in many ways the final act of betrayal by owner Lou Schwechheimer. First, Schwechheirmer changed the team name from the Zephyrs, which New Orleans embraced, to the Baby Cakes. The name is loathed by most in the New Orleans area.” 2
More troubling is this: Schwechheimer bought the New Orleans team in 2016. At the time, local media reported this: “Schwechheimer, announced Monday as manager and controller of a company that has bought 50 percent of the New Orleans Zephyrs, said that type of diligence, dedication and now experience will be used to turn around this city’s Triple-A team.” 3
The Eagle reports this: “Having the baseball team expand its operations from baseball to real estate along the river has been part of the plan since talks started between the team owners and city officials about three years ago, and it played a major role in attracting the team to Wichita, officials with the city and the team said.”
If all this reporting is true, talks about moving the team from New Orleans started in 2016, the same year Schwechheimer purchased the team and said he would use “diligence” and “dedication” to turn around the New Orleans team.
That’s something to think about. Is this a reliable person?
Also: The $1 per acre reminds us of other $1 dollar deals the city has crafted. In 2012, the city leased land it owned in Waterwalk for $1 per year for 93 years. There were apartments built, but the city did not follow through on an important part of the deal. 4 Other developments in Waterwalk were leased for $1 per year. 5
In these instances, apartments and a hotel were built. But in general, Waterwalk has been a dismal failure, and in recent years its fortunes have declined farther.
In 2011 the city decided to build a parking garage downtown with retail space. It leased 8,500 square feet of that space to Dave Burk for $1 per year. Much of that space has remained vacant since it was built.
Can’t we see some progress on these projects before the city does it again?
Then, these developers are from out-of-town, like — dare I say — the Minnesota Guys. At one time the toast of the town, their multi-count criminal indictment for securities fraud is on appeal to the Kansas Supreme Court on a jurisdictional matter. Other than that, they left a trail of broken promises and bad debts in downtown Wichita.
For these reasons — a surprise announcement that has been withheld from citizens, a broken website, repeating a pattern that hasn’t been successful — we need to take at least a few weeks to mull over this deal.
Then, there’s this: In the agenda packet, section 6.03 of the development agreement holds this surprise: “The 1% City sales tax has been approved at an election, and the City agrees that the City sales tax revenues generated within the STAR Bond District will be committed to pay the principal and interest of the STAR Bonds.”
I have no idea what this means. But how did this appear in an official city document and an agreement with a developer?
The Wichita Eagle editorial board notices problems with a survey gathering feedback on Century II.
What will we learn from a survey gathering public opinion on the future of Century II in downtown Wichita? Not much, according to a Wichita Eagle editorial. 1
The editorial presents evidence from an expert indicating the survey will produce results that “will be neither scientifically valid nor representative of the city as a whole.” The problems lie with the nature of the questions and self-selected participants unlikely to be representative of the city.
I commend the editorial board for bringing this issue to our collective attention. It’s important, and not unprecedented in Wichita. If we look beyond this survey, we’ll find other examples of the same:
In 2014 the city was quite proud of its engagement and positive response regarding the proposed city sales tax. But on election day, 62 percent of voters said no to the tax.
In 2013 the city established a website and program called “Activate Wichita.” It was a virtual town hall where citizens and officials could propose ideas and collect feedback. But as I showed, when using the voting system there was no option for expressing disagreement or disapproval with an idea. “Neutral” was as much dissent as Wichitans could express in this system.
The cost of fixing an oversight in the design of Naftzger Park in downtown Wichita is rising, and again we’re not to talk about it, even though there are troubling aspects.
Last week the Wichita City Council was scheduled to consider an item regarding the rebuild of Wichita City Council. That item was removed from the agenda the day before the meeting. It now appears on the agenda for the February 12 meeting, and with a higher price tag.
(“Consider” is not quite the right term, as the item was on the council’s consent agenda. That’s where items are passed in bulk, usually without discussion.)
As the city explains in the agenda packet for this week, “Naftzger Park currently has a small pond that acts as a storm water retention facility during rain events. Proposed improvements to Naftzger Park will eliminate the pond and all available storm retention. The project does not include funding for replacing the retention capacity.” The cost is given as $115,000, up from last week’s $85,000.
As explained last week, this seems like a major oversight in the original project plans. The city has regulations regarding stormwater retention that private sector developers must follow. Didn’t any city planners consider these regulations as the project was planned? Didn’t any council member or bureaucrat look at the plans and wonder about stormwater drainage? Wasn’t there a highly-regarded architect designing the park? What about TGC Development, the developer of the surrounding property, to whom the city effectively outsourced the development of Naftzger Park? The construction manager?
Of note: This week the agenda tells us this: “Funding is available for transfer due to the scope of project being adjusted to remove some the structural repairs and the abutment treatment after discussion with the railroad were not successful.” This sounds like structural repairs were planned but not executed. This deserves discussion, but with the item being on the consent agenda, discussion is not likely.
Of further note: The February 5 agenda stated, “Funding is available for transfer due to underruns of bid items upon project completion and favorable bid pricing.” This made it sound like all planned work was completed and the city spent less than budgeted, even if through happenstance. This week we’re being told something different.
An incentive program in Wichita should cause us to question why investment in Wichita is not feasible without subsidy.
At its February 5, 2019 meeting, the Wichita City Council will consider an item regarding economic development in Delano. The owner of a building there has applied for financial assistance under the city’s facade improvement program.
The purpose of the facade improvement program, according to city documents, is to provide “low-cost loans and grants” to help improve the appearance of buildings “located in defined areas needing revitalization, including the City’s core area.”
The matter before the council this week is to accept the petition of the property owner and set February 19, 2019 for the public hearing.
Undoubtedly council members will praise the property owner for deciding to invest in Wichita. I’m glad he is, and it sounds like the project will improve the Delano area. But the need for this item raises a few questions regarding public policy in Wichita that are more important than any single project.
First, city documents state: “The Office of Economic Development has reviewed the economic (‘gap’) analysis of the project and determined there is a financial need for incentives based on the current market.” In other words, the city has determined that this project is not economically feasible unless it receives a government subsidy. Will any council members ask why is it not possible to renovate a building in the core of Wichita without subsidy? What factors in Wichita — specifically Delano — make it impossible to have investment like this without subsidy?
Second: Wichita officials, especially Wichita Mayor Jeff Longwell, tell us that the city doesn’t use cash as an economic development incentive. But this proposal includes a cash grant of $30,000. This is not a low-cost loan that must be repaid. Instead, it is an incentive, a gift — and it’s cash.
The cost of the Naftzger Park makeover is rising, will be paid for with borrowed funds, and possibly handled without public discussion.
The cost of the Naftzger Park project in downtown Wichita is rising, according to an item the Wichita City Council will consider at its Tuesday February 5, 2019 meeting. According to city documents, an additional $85,000 is needed for stormwater retention, a function the former pond provided.
This seems like a major oversight in the original project plans. The city has regulations regarding stormwater retention that private sector developers must follow. Didn’t any city planners consider these regulations as the project was planned? Didn’t any council member or bureaucrat look at the plans and wonder about stormwater drainage? Wasn’t there a highly-regarded architect designing the park? What about TGC Development, the developer of the surrounding property, to whom the city effectively outsourced the development of Naftzger Park? The construction manager?
The extra cost is proposed to come from savings realized in another nearby project. That requires a waiver of policy, according to the agenda: “Staff requested waiver of City Council Policy No. 2 regarding the use of projects savings to allow this transfer of funds.”
On top of that, this money will be borrowed. An accompanying resolution (number 19-048) provides the authorization: “Section 2. Project Financing. All or a portion of the costs of the Project, interest on financing and administrative and financing costs shall be financed with the proceeds of general obligation bonds of the City.”
Borrowing this money, even though it is a small amount, is a significant public policy issue. The city decided to use tax increment financing (TIF) to pay for this project. City officials pitch this as a method of financing that costs the general public nothing, as the TIF bonds are repaid from a project’s future property taxes.
In this case, as the surrounding development by TGC starts to pay higher property taxes, these taxes would be used to pay for Naftzger Park. (Never mind who pays for the public services the development will consume.)
But now, some expenses of the project have been shifted away from TIF to the general city.
The equitable way of handling this is to charge this expense to the TIF district. Either that, or to the responsible parties whose oversight, we now see, was lacking.
By the way, this item is on the consent agenda, meaning there will be no discussion unless a city council member requests the item to be “pulled” for discussion and a potentially separate vote. (A consent agenda is a group of items that are voted on in bulk with a single vote. An item on a consent agenda will be discussed only if a council member requests the item to be “pulled.” If that is done, the item will be discussed. Then it might be withdrawn, voted on by itself, or folded back into the consent agenda with the other items. Generally, consent agenda items are considered by the city to be routine and non-controversial, but that is not always the case.)
Following, an excerpt from the February 5, 2019 city council agenda:
Background: Naftzger Park currently has a small pond that acts as a storm water retention facility during rain events. Proposed improvements to Naftzger Park will eliminate the pond and all available storm retention. The project does not include funding for replacing the retention capacity.
Analysis: With the elimination of the existing pond, underground on-site storage is necessary to prevent a negative impact on the area storm sewer system and the surrounding developments during rain events.
Financial Considerations: Currently, the Stormwater Utility does not have funding available for these improvements. Staff proposes transferring $85,000 in General Obligation bond funding from the Douglas Underpass project. Funding is available for transfer due to underruns of bid items upon project completion and favorable bid pricing. Staff requested waiver of City Council Policy No. 2 regarding the use of projects savings to allow this transfer of funds. The total budget for the stormwater retention facility would be $85,000 and the revised budget for Douglas Underpass would be $2,015,000.
The Wichita City Council will consider approval of a redevelopment plan in a tax increment financing (TIF) district.
This week the Wichita City Council will hold a public hearing considering approval of more tax increment financing (TIF) spending in downtown Wichita. The spending is for the second phase of redevelopment of the Union Station property on East Douglas. According to city documents, the total cost of this phase is $31,000,000, with TIF paying for $2,954,734. 1
This is a pay-as-you-go form of TIF, which means the city does not borrow funds as it would in a traditional TIF district. Instead, the eligible portion of the developer’s property taxes will be rerouted back to the development as they are paid.
The TIF district was established in 2014. The council this week considers a redevelopment plan, which authorizes spending TIF funds on a specific project. Redevelopment plans must be approved by a two-thirds majority of the council. While overlapping jurisdictions like counties and school districts can block the formation of a TIF district, they have no such role in the approval of a redevelopment plan.
Of note, this public hearing is being held after the fact, sort of. City documents state: “A development agreement was approved by the City Council on August 7, to allow for the developer to begin non-TIF eligible improvements in order to meet deadlines for a new tenant.” The city documents for the August 7 meeting hold this: 2
The Developer has requested that the development agreement be approved now, prior to adoption of the project plan, to allow work to begin on the Meade Corridor improvements in order to complete the project in time for the tenant to move in. The Development agreement is drafted to allow for the Meade Corridor improvements to occur following adoption of the agreement, however, any work or reimbursement for TIF is contingent on City Council adoption of the project plan following the September 11 public hearing.
Citizens have to wonder will the September 11 public hearing have any meaning or relevance, given that on August 7 the city gave its de facto approval of the redevelopment plan.
Following, more information about tax increment financing.
Tax increment financing disrupts the usual flow of tax dollars, routing funds away from cash-strapped cities, counties, and schools back to the TIF-financed development. TIF creates distortions in the way cities develop, and researchers find that the use of TIF means lower economic growth.
How TIF works
A TIF district is a geographically-defined area.
In Kansas, TIF takes two or more steps. The first step is that cities or counties establish the boundaries of the TIF district. After the TIF district is defined, cities then must approve one or more project plans that authorize the spending of TIF funds in specific ways. (The project plan is also called a redevelopment plan.) In Kansas, overlapping counties and school districts have an opportunity to veto the formation of the TIF district, but this rarely happens. Once the district is formed, cities and counties have no ability to object to TIF project plans.
Figure 1.Before the formation of the TIF district, the property pays taxes to the city, county, school district, and state as can be seen in figure 1. Because property considered for TIF is purportedly blighted, the amount of tax paid is usually small. Whatever it is, that level is called the “base.”
Figure 2.After approval of one or more TIF project plans the city borrows money and gives it to the project or development. The city now has additional debt in the form of TIF bonds that require annual payments. Figure 2 illustrates. (There is now another form of TIF known as “pay-as-you-go” that works differently, but produces much the same economic effect.)
Figure 3.Figure 3 shows the flow of tax revenue after the formation of the TIF district and after the completion of a project. Because buildings were built or renovated, the property is worth more, and the property tax is now higher. The development now has two streams of property tax payments that are handled in different ways. The original tax — the “base” — is handled just like before, distributed to city, state, school district, and the state, according to their mill levy rates. The difference between the new tax and the base tax — the “increment” — is handled differently. It goes to only two destinations (mostly): The State of Kansas, and repayment of the TIF bonds.
Figure 4.Figure 4 highlights the difference in the flow of tax revenues. The top portion of the illustration shows development outside of TIF. We see the flows of tax payments to city, county, school district, and the state. In the bottom portion, which shows development under TIF, the tax flows to city, county, and school district are missing. No longer does a property contribute to the support of these three units of government, although the property undoubtedly requires the services of them. This is especially true for a property in Old Town, which consumes large amounts of policing.
(Cities, counties, and school districts still receive the base tax payments, but these are usually small, much smaller than the incremental taxes. In non-TIF development, these agencies still receive the base taxes too, plus whatever taxes result from improvement of the property — the “increment,” so to speak. Or simply, all taxes.)
The Kansas law governing TIF, or redevelopment districts as they are also called, starts at K.S.A. 12-1770.
TIF and public policy
Originally most states included a “but for” test that TIF districts must meet. That is, the proposed development could not happen but for the benefits of TIF. Many states have dropped this requirement. At any rate, developers can always present proposals that show financial necessity for subsidy, and gullible government officials will believe.
Similarly, TIF was originally promoted as a way to cure blight. But cities are so creative and expansive in their interpretation of blight that this requirement, if it still exists, has little meaning.
The rerouting of property taxes under TIF goes against the grain of the way taxes are usually rationalized. We use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from benefiting from police protection.
So when we pay property tax — or any tax, for that matter — people may be comforted knowing that it goes towards police and fire protection, street lights, schools, and the like. (Of course, some is wasted, and government is not the only way these services, especially education, could be provided.)
But TIF is contrary to this justification of taxes. TIF allows property taxes to be used for one person’s (or group of persons) exclusive benefit. This violates the principle of broad-based taxation to pay for an array of services for everyone. Remember: What was the purpose of the TIF bonds? To pay for things that benefited the development. Now, the development’s property taxes are being used to repay those bonds instead of funding government.
One more thing: Defenders of TIF will say that the developers will pay all their property taxes. This is true, but only on a superficial level. We now see that the lion’s share of the property taxes paid by TIF developers are routed back to them for their own benefit.
It’s only infrastructure
In their justification of TIF in general, or specific projects, proponents may say that TIF dollars are spent only on allowable purposes. Usually a prominent portion of TIF dollars are spent on infrastructure. This allows TIF proponents to say the money isn’t really being spent for the benefit of a specific project. It’s spent on infrastructure, they say, which they contend is something that benefits everyone, not one project specifically. Therefore, everyone ought to pay.
This attitude is represented by a comment left at Voice for Liberty, which contended: “The thing is that real estate developers do not invest in public streets, sidewalks and lamp posts, because there would be no incentive to do so. Why spend millions of dollars redoing or constructing public streets when you can not get a return on investment for that”
This perception is common: that when we see developers building something, the City of Wichita builds the supporting infrastructure at no cost to the developers. But it isn’t quite so. About a decade ago a project was being developed on the east side of Wichita, the Waterfront. This project was built on vacant land. Here’s what I found when I searched for City of Wichita resolutions concerning this project:
Figure 5. Waterfront resolutions.Note specifically one item: $1,672,000 for the construction of Waterfront Parkway. To anyone driving or walking in this area, they would think this is just another city street — although a very nicely designed and landscaped street. But the city did not pay for this street. Private developers paid for this infrastructure. Other resolutions resulted in the same developers paying for street lights, traffic signals, sewers, water pipes, and turning lanes on major city streets. All this is infrastructure that we’re told real estate developers will not pay for. But in order to build the Waterfront development, private developers did, with a total cost of these projects being $3,334,500. (It’s likely I did not find all the resolutions and costs pertaining to this project, and more development has happened since this research.)
In a TIF district, these things are called “infrastructure” and will be paid for by the development’s own property taxes — taxes that must be paid in any case. Outside of TIF districts, developers pay for these things themselves.
If not for TIF, nothing will happen here
Generally, TIF is justified using the “but-for” argument. That is, nothing will happen within a district unless the subsidy of TIF is used. Paul F. Byrne explains:
“The but-for provision refers to the statutory requirement that an incentive cannot be awarded unless the supported economic activity would not occur but for the incentive being offered. This provision has economic importance because if a firm would locate in a particular jurisdiction with or without receiving the economic incentive, then the economic impact of offering the incentive is non-existent. … The but-for provision represents the legislature’s attempt at preventing a local jurisdiction from awarding more than the minimum incentive necessary to induce a firm to locate within the jurisdiction. However, while a firm receiving the incentive is well aware of the minimum incentive necessary, the municipality is not.”
“This paper conducts a comprehensive assessment of the effectiveness of Chicago’s TIF program in creating economic opportunities and catalyzing real estate investments at the neighborhood scale. This paper uses a unique panel dataset at the block group level to analyze the impact of TIF designation and investments on employment change, business creation, and building permit activity. After controlling for potential selection bias in TIF assignment, this paper shows that TIF ultimately fails the ‘but-for’ test and shows no evidence of increasing tangible economic development benefits for local residents.” (emphasis added)
In the paper, the author clarifies:
“To clarify these findings, this analysis does not indicate that no building activity or job crea-tion occurred in TIFed block groups, or resulted from TIF projects. Rather, the level of these activities was no faster than similar areas of the city which did not receive TIF assistance. It is in this aspect of the research design that we are able to conclude that the development seen in and around Chicago’s TIF districts would have likely occurred without the TIF subsidy. In other words, on the whole, Chicago’s TIF program fails the ‘but-for’ test.
Later on, for emphasis:
“While the findings of this paper are clear and decisive, it is important to comment here on their exact extent and external validity, and to discuss the limitations of this analysis. First, the findings do not indicate that overall employment growth in the City of Chicago was negative or flat during this period. Nor does this research design enable us to claim that any given TIF-funded project did not end up creating jobs. Rather, we conclude that on-average, across the whole city, TIF was unsuccessful in jumpstarting economic development activity — relative to what would have likely occurred otherwise.” (emphasis in original)
The author notes that these conclusions are specific to Chicago’s use of TIF, but should “should serve as a cautionary tale.”
The paper reinforces the problem of using tax revenue for private purposes, rather than for public benefit: “Essentially, Chicago’s extensive use of TIF can be interpreted as the siphoning off of public revenue for largely private-sector purposes. Although, TIF proponents argue that the public receives enhanced economic opportunity in the bargain, the findings of this paper show that the bargain is in fact no bargain at all.”
TIF is social engineering
TIF represents social engineering. By using it, city government has decided that it knows best where development should be directed. In particular, the Wichita city council has decided that Old Town and downtown development is on a superior moral plane to other development. Therefore, we all have to pay higher taxes to support this development. What is the basis for saying Old Town developers don’t have to pay for their infrastructure, but developers in other parts of the city must pay?
TIF doesn’t work
Does TIF work? It depends on what the meaning of “work” is.
If by working, do we mean does TIF induce development? If so, then TIF usually works. When the city authorizes a TIF project plan, something usually gets built or renovated. But this definition of “works” must be tempered by a few considerations.
Does TIF pay for itself?
First, is the project self-sustaining? That is, is the incremental property tax revenue sufficient to repay the TIF bonds? This has not been the case with all TIF projects in Wichita. The city has had to bail out two TIFs, one with a no-interest and low-interest loan that cost city taxpayers an estimated $1.2 million.
The verge of corruption
Second, does the use of TIF promote a civil society, or does it lead to cronyism? Randal O’Toole has written:
“TIF puts city officials on the verge of corruption, favoring some developers and property owners over others. TIF creates what economists call a moral hazard for developers. If you are a developer and your competitors are getting subsidies, you may simply fold your hands and wait until someone offers you a subsidy before you make any investments in new development. In many cities, TIF is a major source of government corruption, as city leaders hand tax dollars over to developers who then make campaign contributions to re-elect those leaders.”
We see this in Wichita, where the regular recipients of TIF benefits are also regular contributors to the political campaigns of those who are in a position to give them benefits. The corruption is not illegal, but it is real and harmful, and calls out for reform. See In Wichita, the need for campaign finance reform.
The effect of TIF on everyone
Third, what about the effect of TIF on everyone, that is, the entire city or region? Economists have studied this matter, and have concluded that in most cases, the effect is negative.
“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 TIF districts are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:
“If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.
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.” (emphasis added)
In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.” (emphasis added)
“This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.” (emphasis added)
These studies and others show that as a strategy for increasing the overall wellbeing of a city, TIF fails to deliver prosperity, and in fact, causes harm.
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Notes
Wichita city council agenda packet for September 11, 2018. ↩
Wichita city council agenda packet for August 7, 2018. ↩
