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.
—
Notes
Wichita city council agenda packet for September 11, 2018. ↩
Wichita city council agenda packet for August 7, 2018. ↩
It may be very expensive for the City of Wichita to terminate its agreement with the Wichita Wingnuts baseball club, and there are questions.
As the City of Wichita prepares to build a new stadium for a new baseball team, there is the issue of the old stadium and the old team. The city has decided that the old stadium will be razed. On Tuesday the city council will consider what to do about the old team.
The old team, the Wichita Wingnuts, has a lease agreement with the city. The lease is from January 2015 and is for a period of ten years. The documents, both the lease from 2015 and the proposed settlement to be considered this week, appear in full in Wichita city council agenda packets. I’ve extracted the relevant pages for easier access. Click on lease or proposed settlement.
According to the settlement, the Wingnuts will receive either $2.2 million or $1.2 million, the smaller amount applying in the case the city is “unable to reach an agreement with an affiliated minor league baseball team in the year 2018.” The payment is scheduled to be made in installments over the next several years. (Section 2c)
Reading the lease, I can’t find anything regarding the need to pay for terminating the lease. So why the need to pay up to $2.2 million to terminate?
Here’s a possible answer: City documents hold this: “This negotiated settlement resolves all claims and potential claims that the parties have or may have, including breach of the Lease, loss of revenue, injunctive relief, specific performance, other contract breaches, tort assertions, and claims for equitable relief without the uncertainly of litigation.”
So there may be disputes that need to be resolved. Now the question becomes this: What did the city do? What could be so bad that the remedy is to pay the Wingnuts up to $2.2 million? Citizens ought to know the answer to this question.
Further, why is the amount of the settlement contingent on what happens in Wichita in the future? (Remember, the settlement is $2.2 million if the city lands a new team, but only $1.2 million if it doesn’t.) If the purpose of the settlement is to compensate the Wingnuts for harm caused by the city, how and why is the magnitude of harm dependent on future events?
Such a large settlement is especially surprising given the low rent the Wingnuts paid and the city’s history with the Wingnuts as a tenant. Consider:
The Wingnuts didn’t always pay their rent. The city charged the Wingnuts just $25,000 annual rent, and the team was $77,000 behind in rent in January 2015. The proposed settlement agreement states: “As of the Effective Date, the 2018 rent payment in the amount of Twenty-five Thousand Dollars ($25,000) due and payable by WIB to the City shall be waived and no longer due and payable by WIB.” (Section 2c) (WIB is the company that owns the Wingnuts.)
There have also been disputes over utility payments. But, the city will forgive the water and sewer bill: “The City shall pay all utility payments due to the Department of Public Works and Utilities that are assessed for 2018.” (Section 2d)
It’s clear that the Wingnuts haven’t always lived up to the basics of its agreement with the city. Why, then, does the city feel such a large obligation upon termination? Paragraph 13 of the lease says “Lessor agrees not to utilize termination for convenience for the purpose of placing any professional baseball franchise at the Lawrence-Dumont Stadium site.” This is what the city is doing. But, in paragraph 23: “The parties agree that upon a violation of any provision of this lease, the aggrieved party may, at its option, terminate this lease by giving the breaching party not less than 30 days written notice of termination.” Non-payment of rent seems like it ought to be a violation of the lease, giving the city the right to terminate the lease for cause.
What is the source of the $2.2 million? City documents state the source is “management agreement payments paid by the new AAA baseball team.” The meaning of “management agreement payments” is unclear and a question that needs an answer. But presumably this is money that the city would receive from the new team. If not paid to the Wingnuts, these funds might be available for other purposes.
And: If the city is not able to land a new team, the city will have to pay the Wingnuts $1.2 million without any compensating revenue source.
Repairs, replacements, and improvements
Here’s a puzzling aspect of the settlement: How was the dollar amount determined? City documents state: “The value of the severance is based on the number of years remaining in the existing lease and the anticipated City financial cost of capital repairs, replacements and improvements over those same remaining years.” (emphasis added)
What? “Repairs, replacements and improvements” to a stadium that will be demolished soon? Why is this a consideration?
Questions, but little time
There are questions, but little time for answers. The agenda packet was posted on the city’s website on Friday September 7, at 12:03 pm. The council will consider this item Tuesday morning.
Do council members have answers to these questions? Some of these matters may have been discussed in executive session. Now that the matters have been settled, it’s time to let citizens know the details.
But if council members don’t have answers, I don’t think they can make an informed vote.
