A development near downtown Wichita may receive subsidy through four different avenues.
This week the Wichita City Council will consider approval of a development agreement with EPC Real Estate, LLC, for the Delano catalyst site. This is vacant land north of Douglas, between the Advanced Learning Library and the River Vista project.
Update: The measure passed four votes to three, with Bluebaugh, Frye, and Longwell in the minority.
One form of additional subsidy is forgiveness of sales tax on the construction of buildings. The Letter of Intent for Industrial Revenue Bonds the council will consider states: “The City’s governing body has authorized an application for sales tax exemption with an estimated value of $1,611,822.”
But a really big gift to the developers is the price of the land. City document state the selling price for the 7.2 acre plot is $750,000. That’s about ($750000 / 7.2 acres) = $104,167 per acre. It’s a pretty good deal for the buyers. A look at some current commercial land listings in Wichita finds these:
1.20 acres at 47th South and Seneca for $425,000, or $354,167 per acre.
0.50 acres at 140 N. West St. for $225,000, or $450,000 per acre.
20.00 acres at 1462 S. Maize Road “Great for entertainment, retail, etc.” for $4,251,456, or $212,573 per acre.
0.52 acres at 640 N. Webb Road for $368,570, or $708,788 per acre.
It’s clear that the developers are buying the land from the city for a small fraction of its value.
By the way: Wichita Mayor Jeff Longwell says the city will no longer offer cash incentives for economic development. But selling land a deeply discounted price: Is that different from a cash incentive?
We might also note that this project will receive millions in benefits from Tax Increment Financing. This was a program born out of a perceived need to help redevelop blighted property. This development site, however, is vacant land.
Finally: If downtown Wichita is really progressing as well as its boosters say, why is it necessary to offer so much subsidy to develop a project like this?
Wichita Business Journal: “And many aren’t shy about bringing cash to the table as an incentive. In Wichita, in the wake of the defeat at the polls in 2014 of a sales tax measure that would have been used in part for economic development activities, such a war chest isn’t an option.”
Wichita and Sedgwick County are contributing cash and cash-equivalents to the deal. See below for more.
Further, the city has other ways to fund a “war chest” of incentives. While the sales tax failed to pass, there was nothing to prevent the city council from raising other taxes (such as property tax or franchise fees) to raise funds for economic development. Now there is a property tax limitation imposed by the state, but there are many loopholes the council could drive a large truck through, including holding an election asking voters to raise property taxes.
Also, the city justifies spending on economic development incentives by the positive return to the city. That is, for every dollar the city spends or forgoes in future taxes, it receives a larger amount in return. For this project, the analysis provided by Center for Economic Development and Business Research at Wichita State University reports a benefit/cost ratio of 2.75 to one for the city. That is, the city believes it will receive $2.75 for every $1.00 “invested.” If the city truly believes this, it should have no hesitation to issue bonds to fund this incentive, repaying the bonds with the projected benefits.
Wichita Business Journal: “‘Here … the state, city and county put together a very creative package focused on infrastructure and training,’ [Spirit CEO Tom] Gentile said.”
I suppose the innovative aspects of the package are the formation of a new business entity to build and own a large building, funded largely by the city and county. Also, the infrastructure referred to may mean the city’s forgiveness of Spirit’s debt to the city regarding a special water project.
Wichita Business Journal: “The government investment isn’t cash, but it is a way of helping Spirit grow that Gentile said combined with local training opportunities to make the government involvement important to Spirit’s decision to expand in Wichita.”
According to the agreement the city and county will consider this week, both Sedgwick County and the City of Wichita are contributing cash. The city will also forgive a large debt owed by Spirit. It’s hard to see how canceling a debt is different from giving cash.
Also, city, county, state, and school district are canceling millions in property and sales taxes that Spirit would otherwise owe, which is also difficult to distinguish from a cash benefit.
Finally, the state, under the PEAK problem, will likely refund to Spirit the state income tax withheld from their paychecks (minus a small fee).
Wichita Business Journal: “‘Because Spirit was willing to look at another way of investing, because this community said it was more important to invest in other ways, they’re allowing us to invest in infrastructure instead of handing Spirit cash,’ Wichita Mayor Jeff Longwell said Wednesday. ‘We believe that our community can rally behind that. We’re investing in Spirit and they’re investing in our community.'”
I’d really like to know the “another way of investing” the mayor mentions. Plus, contrary to the mayor’s assertion, the city is handing Spirit cash. Well, it’s giving cash to a new business entity whose sole purpose is to provide a new building for Spirit. Perhaps for Jeff Longwell that’s a distinction with a meaningful difference. If so, that’s too bad.
There are differing opinions as to the necessity and wisdom of economic development incentives. But we ought to expect the unvarnished truth from our mayor and economic development officials. It would be great if the Wichita Business Journal helped report the truth.
It’s good news that Spirit AeroSystems is expanding in Wichita. Let’s look at the cost.
While it is good news that Spirit AeroSystems is expanding its Wichita operations, it is not without cost to several governmental agencies. Here’s a summary of what is publicly available so far.
First, a new “entity” will be formed in order to facilitate the construction and ownership of a new building on the Spirit campus. 1
This entity will be funded with $7 million in cash from Sedgwick County and $3 million cash from the City of Wichita. Further, the city will forgive Spirit’s debt of $3.5 million associated with a water project. 2
Second, through the mechanism of Industrial Revenue Bonds,3 Spirit receives a property tax exemption of one hundred percent for five years, with renewal for another five years if goals are met. Despite the use of the term “bond,” no governmental entity is lending money to Spirit, and no one except Spirit is liable for bond repayment.
Third: The bonds confer another benefit to Spirit: According to city documents, “IRBs will, pursuant to STATE law, provide for a sales tax exemption on materials and labor subject to sales tax necessary to construct and equip FACILITY.” 4 City documents give no dollar amount is given for the sales tax exemption. But in the analysis conducted by Center for Economic Development and Business Research at Wichita State University these figures are used for the amount of sales tax exemption: City of Wichita: $279,445. Sedgwick County: $137,354. State of Kansas: $5,370,270. Total: $5,787,069. 5
Fourth, this project will undoubtedly qualify for PEAK, or Promoting Employment Across Kansas. This is a State of Kansas program that allows companies to keep the state income taxes their employees pay through paycheck withholding, less a small fee. 6 It isn’t possible to know in advance how much PEAK benefit the company will receive, because the individual circumstances of each employee determine the income tax withheld. The following calculation, however, gives an indication of the magnitude of the amount of PEAK benefits Spirit can expect:
$56,000 annual salary / 26 pay periods = $2,154 per bi-weekly pay period. For a married worker with two children, withholding tables show $55 to be withheld each pay period, or $55 * 26 = $1,430 per year. For 1,000 employees, the PEAK benefit is $1,430,000 per year. 7
There may be other programs that this project qualifies for.
Are these incentives necessary?
Taxpayers might be wondering if these incentives are necessary for Spirit to be able to expand its operations, and for it to select Wichita as the site. Spirit says it has received generous offers from other locations. If so, Spirit could do itself a favor by revealing these offers. So too, could other Wichita companies that have claimed intense courtship by other cities. But the economic development industry operates in darkness.
One thing that would also increase the credibility of economic development efforts is for Wichita Mayor Jeff Longwell (and others) to stop making claims of “no more cash incentives.” The city explicitly offers cash in this proposal. The city also offers to cancel a debt, which is just like cash. Forgiveness of future taxes is as good as cash, too.
For years we’ve been told that Wichita needs to diversify its economy, meaning that it relies too heavily on the aircraft industry. This expansion by Spirit will undoubtedly heighten that concentration. We should not turn down this expansion of our local economy. But the incentives that are offered have a cost, and that cost is paid — partly — by other business firms in other industries that are trying to grow in Wichita.
Many will undoubtedly cheer the Spirit announcement as an economic development win on a large scale. It will add many jobs. But the Wichita-area economy is so far behind it will take much more growth than this to catch up with the rest of the nation. In fact, the Wichita-area economy shrank last year. 8 And while many cheer our low unemployment rate, sole reliance on that number hides a shrinking labor force. 9
Also, let’s be appropriately humble when boasting about this expansion. A region’s largest employer deciding to expand in the same city: This is the minimum level of competence we ought to expect from our economic development machinery.
Further, economists caution us to look beyond any single project, no matter how large, and consider the entirety of the local economy. As economist Art Hall has noted, large-employer businesses have no measurable net economic effect on local economies when properly measured. “The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.” 10
That’s assuming that the incentives even work as advertised in the first place. Alan Peters and Peter Fisher, in their paper titled The Failures of Economic Development Incentives published in Journal of the American Planning Association, wrote on the effects of incentives. A few quotes from the study, with emphasis added:
Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.
On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.
The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering their expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.
“The CITY, COUNTY and COMPANY would each take action to establish a new legal entity separate and apart from the CITY, COUNTY and COMPANY for development of the PROJECT (the “ENTITY”) which will take such form as the PARTIES may approve.” Memorandum of Understanding for Project Eclipse, Section I.A. Contained within agenda packet for Wichita City Council meeting for December 13, 2017. ↩
“The COUNTY participation of $7 million US is anticipated to be available cash; the CITY participation would consist of cash in the amount of $3 million US, forgiveness of $3.5 million US in future COMPANY payments associated with the CAPITAL COMPONENT and an agreement to make additional capital improvements relating to the WATER AGREEMENT in an approximate cost of $1 million US.” Memorandum of Understanding for Project Eclipse, Section I.B ↩
Wichita Eagle Opinion Line, November 24, 2017: “The kindest word that can be ascribed to State Senator Susan Wagle, when she criticizes the Kansas Supreme Court? Disingenuous. She never mentions Brownback appointee, Justice Caleb Stegall; he has repeatedly agreed with his colleagues on school finance.”
The likely reason Senator Wagle doesn’t mention Justice Stegall when criticizing the Court on school finance matters is that he, along with another judge, hasn’t participated. The recent opinions are signed “BEIER and STEGALL, JJ., not participating. MICHAEL J. MALONE and DAVID L. STUTZMAN, Senior Judges, assigned.” Why? “Justices Carol Beier and Caleb Stegall have both recused themselves from the Gannon case — Stegall because he served as Brownback’s chief counsel before he was appointed to the Kansas Court of Appeals in 2014; Beier did not provide a reason for her recusal.” See Kansas Supreme Court rejects lawmakers’ school finance changes, threatens in new ruling to close schools.
Quality of life, or a boatload of cash
Ron Sylvester in The Hutchinson News: “It’s all about quality of life. [Wichita Mayor Jeff] Longwell said Wichita drew Cargill and its $60 million investment downtown by investing in its arts community, parks, trails and a new library. Businesses move to town, not because of tax breaks and cash incentives, Longwell said, but because the people who work for those companies want to live there.”
First, Wichita didn’t draw Cargill downtown. It was already located in downtown Wichita. Wichita merely retained Cargill. No new jobs are anticipated.
As to the role of quality of life: Possibly that was a factor. More likely? The millions in subsidy Cargill will receive. Cargill tapped pretty much every economic development incentive program it could, along with a few innovative additions, such as renting its parking garage to the city during the times Cargill doesn’t need it.vSee More Cargill incentives from Wichita detailed.
Let’s ask the mayor this question: If tax breaks and cash incentives were not needed, why did the city (and the state) award so much in incentives?
Who oversaw Wichita schools when this happened?
Teachers ‘fearful’ about escalating violence at Southeast High (Wichita Eagle, December 1, 2017): Some employees at Southeast High School in Wichita say they have ‘grave concerns’ about escalating violence and unruly behavior at the school, and they’re urging leaders to take ‘decisive and strong actions’ to combat it.” This continues a theme from this summer, as further reported in Behavior is getting worse in Wichita classrooms, data shows. (Wichita Eagle, June 16, 2017): “Discipline problems have increased substantially in Wichita schools over the past four years, particularly among the district’s youngest students, according to data obtained by The Eagle. The situation is frustrating teachers, prompting some of them to leave the profession, and has inspired a new program aimed at teaching elementary school students how to pay attention, follow directions and control their emotions.”
I was surprised to learn of these problems that have been developing in the Wichita Public Schools. That’s because John Allison, the immediate past superintendent, was universally praised by the school board and district administration. Allison left at the end of June after serving eight years to become superintendent in Olathe. Hopefully that district will not experience the erosion in discipline that Allison presided over in Wichita.
Amtrak affordable for whom?
Wichita Eagle Opinion Line, December 3, 2017: “How I long for affordable rail service connecting Wichita to major cities. Traveling to family for the holiday reminds me of how sad it is to live in such a remote, isolated, inaccessible place as Wichita.” Inaccessible? We were told that subsidies to discount airlines and a new airport terminal would fix that. Then, the only reason Amtrak is affordable is that taxpayers pay a lot to keep Amtrak running. (That’s if Amtrak prices are really affordable. I just compared a few Amtrak trips with airline trips, and airfares aren’t much more, and offer many more options as to time. And if you value your time, there is no better way to waste it than on a train.) Other forms of travel receive subsidy too, but peanuts compared to Amtrak. From Randal O’Toole, Stopping the Runaway Train: The Case for Privatizing Amtrak:
According to the U.S. Bureau of Transportation Statistics, after adjusting for inflation to 2011 dollars, subsidies to domestic air travel averaged about $14 billion a year between 1995 and 2007. Considering that the airlines carried an average of more than 500 billion passenger miles a year during those years, average subsidies work out to about 2.8 cents per passenger mile (see Figure 2).
Using Bureau of Transportation Statistics’ numbers, highway subsidies over the same time period averaged about $48 billion a year. Highways carried about 4.1 trillion passenger miles per year, for an average subsidy of 1.1 cents per passenger mile. While 95 percent of the airline subsidies came from the federal government, all of the highway subsidies came from state and local governments.
By comparison, federal Amtrak subsidies over the same time period averaged 25 cents per passenger mile. State subsidies averaged another 2.8 cents. Per-passenger-mile subsidies to Amtrak were nearly 9 times subsidies to air travel and nearly 22 times subsidies to highway travel.
The use of PEAK, a Kansas economic development incentive program, varies widely among counties.
An economic development incentive program in Kansas is PEAK, or Promoting Employment Across Kansas. This program allows companies to retain 95 percent of the payroll withholding tax of employees. 1
Data is available for fiscal years 2010 through 2015. For this period, we can see that the application or use of PEAK varies widely among counties. Here is data for the two largest counties in Kansas:
Johnson County: 135 projects, 17,643 new or retained jobs, $36,085,527 cumulative annual benefits.
Sedgwick County: 8 projects, 1,113 new or retained jobs, $1,858,516 cumulative annual benefits.
According to the U.S. Census Bureau American Fact Finder, the 2016 population of Sedgwick County was 511,995. Johnson County population was 584,451. So Johnson County has 1.14 times the population of Sedgwick County, but it receives some 16 to 19 times the PEAK benefits as Sedgwick County.
Of note, this data is available on Kanview, the state’s data download portal. The data is from a spreadsheet compiled in August 2015. It contains data through fiscal year 2015, which ended on June 30, 2015. Upon my inquiry, it appears no similar data compilations were created in August 2016 or August 2017. I have asked for the data and it is taking some time to prepare it, which leads us to wonder how diligently the state collects data regarding economic development programs.
You can access an interactive visualization of PEAK data here.
I’ve gathered information about PEAK projects and present the data in an interactive visualization. The List table is a simply list of the available data.
The table shows the count of PEAK projects, the sum of new or retained jobs, and the sum of the annual benefits for the projects.
In the table view, you may select which counties appear. Also, a slider lets you choose the minimum number of projects a county must have in order to appear. This is helpful as there are many counties with just one or two projects.
PEAK, a Kansas economic development incentive program, redirects employee income taxes back to the employing company.
An economic development incentive program in Kansas is PEAK, or Promoting Employment Across Kansas. This program allows companies to retain 95 percent of the payroll withholding tax of employees.
PEAK incentive payments can be a substantial sum. Tables available at the Kansas Department of Revenue indicate that for a single person with no exemptions who earns $40,000 annually, the withholding would be $27 per week (for weekly payroll), or $1,404 annually. For a married person with two children earning the same salary, withholding would be $676 annually. Under PEAK, the company retains 95 percent of these values. (These illustrations are based on 2016 tax rates.)
There are requirements regarding the minimum number of jobs to be created or retained. Also, companies must pay wages greater than or equal to the median county wage. 1
Then, the Secretary of Commerce has “discretion to approve applications of qualified companies and determine the benefit period.”
Legislators and public officials like programs like PEAK partly because they can promote these programs as self-financing. That is, the state isn’t subsidizing a company. Instead, the company is paying its own way with its own taxes (actually, its employees’ taxes). PEAK supporters say the state is not sending money to the company. Instead, the company is just holding on to 95 percent of its employees’ withholding taxes instead of sending the funds to the state.
Schemes like PEAK call into question one of the fundamental principles of taxation: That tax funds be used to fund the operations of government, not to enrich one particular person or company. But continually, states and local government use programs like PEAK — and others like tax increment financing (TIF) districts, Community Improvement Districts (CIDs), Industrial Revenue Bonds, and others — that turn over a public function to private interests.
Here’s another consideration regarding the PEAK program. The amount of money withheld from a worker’s paycheck is not the same as the amount of tax the worker actually owes the state. Withholding is only an approximation, and one that is biased in favor of the state. Many Kansas workers receive an income tax refund from the state. This is in recognition that the sum of the withholding taxes paid by a worker is larger than the actual tax liability. Therefore, the state is returning money that the state was not entitled to.
Now, what about workers who are employed at a company that is in the PEAK program and who receive a state income tax refund? Their withholding taxes — 95 percent, anyway — have already been given back to their employer.
So: What is the source of the money used to pay these refunds? How much money is paid in refunds to employees working at PEAK-participating companies?
We should note that the funds don’t come from the PEAK company’s employees, as the employees receive credit for all their withholding taxes, even though 95 percent never contributed to the state treasury.
Inquiry to the Department of Revenue revealed that there are no statistics on actual income tax liability of PEAK employees vs. the amount of withholding tax credited to that employee that was retained or refunded to the PEAK employer. The Department of Commerce referred inquiries to the Department of Revenue.
If we wanted to know how much money was paid in refunds to PEAK-company employees, I believe we would need to examine the account of each affected employee. I’m sure it’s not possible to come up with an answer by making assumptions, because the circumstances of each taxpayer vary widely.
Whatever the amount, it represents state tax revenue being used to fund an economic development incentive program that is pitched as being self-funded.
“PEAK requires the qualified company to commit to creating five new jobs in non-metropolitan counties or ten (10) new jobs in the metropolitan counties of Shawnee, Douglas, Wyandotte, Johnson, Leavenworth and Sedgwick over a two-year period. The qualified company must also pay wages to the PEAK jobs/employees, that when aggregated, meet or exceed the county median wage or North American Industry Classification System (NAICS) average wage for their industry.” Kansas Department of Commerce. Promoting Employment Across Kansas (PEAK) Program. Available at http://kansascommerce.gov/141/Promoting-Employment-Across-Kansas-Progr. ↩
For 2016, personal income in Wichita rose, but is still below 2014 levels.
The Bureau of Economic Analysis, an agency of the United States Department of Commerce, has released personal income figures for metropolitan areas through 2016. For the Wichita metropolitan statistical area, personal income in 2016 rose slightly from 2015 level, but is still below the 2014 level. In real (inflation-adjusted) dollars, personal income fell in 2016.
The trend in personal income mirrors that of the Wichita-area GDP, which is the value of goods and services produced. That fell in 2016. 1
To access an interactive visualization of personal income for all metropolitan areas, click here.
Employment in the Wichita metropolitan area is on an upward tick.
Using seasonally-adjusted figures, employment in the Wichita Metropolitan Statistical Area 1 was 294,800 in January 2017. For September, it is 302,700, an increase of 7,900, or 2.7 percent. This data is from the Bureau of Labor Statistics, part of the United States Department of Labor. 2
The employment data comes from the BLS Current Employment Statistics program, which surveys employers. 3
BLS also collects data regarding employment and unemployment through the Local Area Unemployment Statistics (LAUS) program. 4 It is part of the Bureau’s Current Population Survey (CPS), which is a “monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics.” 5 This data is collected from a survey of households, and the monthly data is not adjusted for seasonality. This is the data series that produces the oft-cited unemployment rate.
It’s important to understand the nature of the unemployment rate. Being a ratio, it has two moving parts, specifically the number of unemployed people and the number of people in the labor force. (The labor force, broadly, is the number of persons working plus those actively looking for work.
It is possible that the unemployment rate falls while the number of people employed falls or rises slowly. This is the general trend in Wichita for the past seven years or so. The nearby table illustrates this. Because the values in this data series are not adjusted for seasonality, I use the average of the proceeding 12 months.
In the first example, the unemployment rate fell by nearly half for the time period chosen. (2010 was the first full year after the most recent recession ended.) That improvement was produced by a small increase in the number of employed people and a large decline in the labor force. Is our area better off for this? Local politicians and bureaucrats seem to think so, as the low unemployment rate is widely cited as a measure of their success in managing the local economy.
The second example uses as its starting point 2008, which was the high mark for employment in the Wichita MSA. The unemployment rate then is nearly the same as today. But both the labor force and the number of employed persons is down.
If we consider only the unemployment rate, it looks like the Wichita area is prospering. But the unemployment rate hides bad news.
In the nearby chart you can see these effects. The unemployment rate has been declining, although it has recently increased slightly. The labor force has been declining. The number of employed persons has increased, although it has also recently declined.
The labor force, specifically the civilian labor force, are those people working, plus those people actively searching for work, minus people under 16 years of age, minus people living in institutions (for example, correctional facilities, long-term care hospitals, and nursing homes), minus people on active duty in the Armed Forces.
BLS defines unemployed people as: “Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.”
The unemployment rate is “the number unemployed as a percent of the labor force.”
Bureau of Labor Statistics. *Glossary.* Available at https://www.bls.gov/bls/glossary.htm. ↩
“The Bureau of Labor Statistics (BLS) has two monthly surveys that measure employment levels and trends: The Current Population Survey (CPS), also known as the household survey, and the Current Employment Statistics (CES) survey, also known as the payroll or establishment survey.
Both surveys are needed for a complete picture of the labor market.
The payroll survey (CES) is designed to measure employment, hours, and earnings in the nonfarm sector, with industry and geographic detail. The survey is best known for providing a highly reliable gauge of monthly change in nonfarm payroll employment. A representative sample of businesses in the U.S. provides the data for the payroll survey.
The household survey (CPS) is designed to measure the labor force status of the civilian noninstitutional population with demographic detail. The national unemployment rate is the best-known statistic produced from the household survey. The survey also provides a measure of employed people, one that includes agricultural workers and the self-employed. A representative sample of U.S. households provides the information for the household survey.
National employment estimates from both the household and payroll surveys are published in the Employment Situation news release each month. The estimates differ because the surveys have distinct definitions of employment and distinct survey and estimation methods.” Bureau of Labor Statistics. Comparing employment from the BLS household and payroll surveys. Available at https://www.bls.gov/web/empsit/ces_cps_trends.htm. ↩
In this episode of WichitaLiberty.TV: Sedgwick County Commissioner Richard Ranzau joins Karl Peterjohn and Bob Weeks to discuss Sedgwick County government issues, including allegations of misconduct by a commission member and the possibility of a Tyson chicken plant. View below, or click here to view at YouTube. Episode 172, broadcast November 11, 2017.
Wichita economic development officials use a circuitous method of estimating the population of downtown Wichita, producing a number much higher than Census Bureau estimates.
Recently the Wichita Business Journal reported:
Getting more people to live in the core was clearly one of the most important tasks for the city. Back in 2010, the report said downtown Wichita was ripe for an additional 1,000 housing units.
That goal seems to have been met. According to a recent report from the group Downtown Wichita, 835 residential units have been completed since 2010. An additional 742 units are in development downtown, where about 2,100 people live today. 1
The report referred to is the 2017 State of Downtown Report. 2 While this report highlights the number of people living in downtown Wichita, it no longer reports the number of people working in downtown. 3
How does Downtown Wichita arrive at the number of residents in downtown? An endnote from the report gives the details:
The 2010 U.S. Census states the population in the 67202 area code is 1,393. Per Downtown Wichita records, 702 units rental units have opened in the Downtown SSMID district since 2010 when the Census was taken. Per data provided directly from the Downtown residential rental properties, the absorption rates of the market rate units has an average of 85%. Per the U.S. Census Bureau, 2011-2015 American Community Survey 5-Year Estimates, the average size of renter-occupied units is 1.25 persons. Therefore, an estimate for the current population is 2,138. 4
What DW has done is to take a reliable figure (the 2010 decennial census) and extrapolate forward to 2016. (Presumably 2016, as the report doesn’t say.)
But there are a few issues, as follows:
First, the calculation includes 702 rental units that have opened since 2010. Have any rental units closed since then? That would be good to know. Curious is that the report prominently mentions “835 units completed since 2010.” There have been condominiums that have opened since 2010. Why would DW use only rental units in its calculation?
Second, the DW calculation makes use of two estimates, absorption rate 5 and size of renter-occupied units. (What about size of owner-occupied units?) Each of these is an estimate that has its own error probabilities, and those errors compound when multiplied.
Third, there is no need to go through this roundabout calculation, as the Census Bureau has provided an estimate for the population of downtown in 2015. Data from the American Community Survey 6 estimates that the population in downtown Wichita for 2015 was 1,438, with a 90 percent confidence interval of plus or minus 242. 7 This means the Census Bureau is confident the population of downtown Wichita in 2015 was in the range of 1,196 to 1,680, that confidence factor being 90 percent.
But DW says the population of downtown is 2,138, which is far — really far — outside the range the Census Bureau gives for the 2015 population. While DW’s population estimate is probably for 2016, it still lies far outside the range of probability, based on Census Bureau estimates.
It’s really curious that DW doesn’t use the Census Bureau estimate of population. That population estimate comes directly from the Bureau’s American Community Survey 5-Year Estimates for 2011 to 2015. DW didn’t use that number, but it relied on the same body of data to get “average size of renter-occupied units” for 2015.
Why would DW use the Census Bureau for one datum but not another, especially when the Census Bureau data reports the statistic DW is trying on its own to estimate in a roundabout manner?
It’s simple. DW’s calculations produce 2,138 people living in downtown. The Census Bureau estimate is a much smaller number: 1,438.
By the way, DW’s calculations start with the 2010 Census Bureau population for downtown. Of the downtown population of 1,393 that year, 253 were men living in institutions like the Kansas Department of Corrections Wichita Work Release facility at Emporia and Waterman Streets. It has a capacity of 250. 8
“Absorption is the amount of space or units leased within a market or submarket over a given period of time (usually one year). Absorption considers both construction of new space and demolition or removal from the market of existing space.” Institute of Real Estate Management. Calculating Absorption. Available at https://www.irem.org/education/learning-toolbox/calculating-absorption. ↩
U.S. Census Bureau, 2011-2015 American Community Survey 5-Year Estimates ↩
Previous versions of the report prominently mentioned the number of daytime workers in downtown Wichita. 3The number most often given was 26,000. But that number is missing from this year’s report. Unless I overlooked it, there is no mention of the number of workers in downtown Wichita.
Why was this number omitted from this year’s report? Earlier this year I found out that the U.S. Census Bureau data series which was the source of this statistic is not a valid measure of the number of people working downtown. That’s because the series counts all the employees of the Wichita public school district as downtown workers solely because the district’s headquarters building is downtown.4 This means the statistic is not valid and meaningful, because most school workers don’t work at the downtown building. Instead, they’re working in schools and other facilities dispersed throughout the district. A similar anomaly exists for Wichita city workers: All are counted as though they work in the city hall building. 5
When I asked Jeff Fluhr, the president of Downtown Wichita, about this he referred my question to Jeremy Hill, the Director of Center for Economic Development and Business Research at Wichita State University. This was — seemingly — reasonable as CEDBR supplied the number to Fluhr’s organization. Hill’s response was unsatisfactory in resolving the issue. In conclusion, Hill wrote to me: “Although the center systematically questions all data sources (federal, state, private, and nonprofit) for reasonableness, limited resources (e.g. time and costs) prevent us from validating and/or cross checking every statistic. In this situation, the center used the appropriate source for the research question and the total number of people estimated to work downtown was within reason.”
Here’s what concerns me. This data comes from a Census Bureau application called “OnTheMap.” When using the OnTheMap application for downtown Wichita, which is zip code 67202, there are two large bright blue dots that stand out from all others. These represent the two highest concentrations of workers in downtown Wichita. One is Census block 201730043001036, which has 7,740 employees. This is a one square block area from First to Second Streets, and Wichita to Water Streets. That block, for the year of this data, held the Wichita school district headquarters building.
7,740 employees is a lot. It’s about one-fourth of the total downtown employee count claimed by Downtown Wichita and CEDBR. It’s more employees than McConnell Air Force Base has, and about twice as many that work at Koch Industries in Wichita.
Importantly, this number is eleven times the number that work at Cargill, a company which Wichita is granting many millions of dollars in incentives just to retain the company in Wichita.
We just have to wonder: Didn’t anyone look at this data in a serious and critical manner? A quick glance at the data by CEDBR, much less “systematically” checking for “reasonableness” should have led to questions. A quick look by Downtown Wichita staff should have spurred these inquiries: Who do all these people work for in that one block? This is a wonderful success story! How can we replicate this great accomplishment in other blocks in downtown Wichita?
And didn’t anyone at the City of Wichita — council members and bureaucrats alike — wonder about these numbers?
That didn’t happen. Or maybe it did, and someone in authority nonetheless decided to proceed to use a statistic that doesn’t mean what city leaders say it means.
That’s why I wrote it was seemingly reasonable for Fluhr to refer me to CEDBR with my questions about the data. In retrospect, it is clear this is a multi-year episode of incompetence, ineptitude, or dishonesty.
But at least this statistic is no longer used.
I asked Cindy Claycomb, who is Chair of the Executive Committee of Downtown Wichita, about this. She replied that all data sources are listed in the report, and that the board relies on the expertise of the Wichita Downtown Development Corporation staff to decide what is presented in each year’s report. She said Jeff Fluhr was the best person to address my concerns. He, as we saw, demurred to CEDBR at WSU.
(By the way, Claycomb is nearly certain to be elected to the Wichita City Council in November. Jeff Fluhr is now, besides president of Downtown Wichita, also president of Greater Wichita Partnership, the new organization regional governments rely on for economic development.)
So: How many jobs are in downtown Wichita? There is another series of census data that is better, but not perfect, as it counts private-sector employees only. That data shows 13,581 workers in downtown Wichita for 2015. 6 But what’s remarkable — and disappointing — about this data series is its trend: It’s going down. The recent peak was 16,658 workers in 2008. By 2015 that number was down by 18 percent. (Again, these are private sector workers only.)
Wichita considers hiring a consultant to help find a baseball team.
In August the Wichita Eagle reported:
Wichitans can hope for an announcement on a new affiliated baseball team coming to Wichita by the end of 2017, Mayor Jeff Longwell says.
“By the end of this calendar year, we feel confident that we will be able to announce a team, who the team is, all of the above,” Longwell told The Eagle Tuesday afternoon. “We hope that we can complete all of those conversations by the end of this year and be able to announce a contract in place.” 1
Evidently the mayor and the city are feeling less confident. Next week’s city council agenda includes a proposal to hire a consulting firm to help the city. The contract the council will consider states: “Wichita desires to retain Beacon Sports as its advisor and exclusive representative for the Assignment, and perform such other advisory services as are mutually agreed upon between the two parties.” 2
The city’s analysis advises: “Based on the encouraging findings, City staff have reached the conclusion that, due to Minor League Baseball (MiLB) rules and protocols, it is necessary to formally contract with a specialized baseball consultant.”
The contract has a cap of $50,000. For this, the contract states, “Beacon Sports will use its best efforts and endeavor to assist Wichita in obtaining and having present to it qualified offers on terms that are acceptable to Wichita, but makes no representation regarding the successful outcome of this Assignment.”
Of note, this item appears on the consent agenda. That’s a collection of agenda items that are voted on in bulk, with one single vote, unless a council member requests an item be “pulled” for discussion and possibly a separate vote. Generally, items on consent agendas are not controversial, and it may hold two dozen or more items.
Kansas hotel guest tax collections presented in an interactive visualization.
Cities and counties in Kansas may levy a transient guest tax collection on hotel guests. It is sometimes called a bed tax or guest tax. The tax is collected as a percentage of total room revenue, not the number of rooms or the rate charged for rooms. While the Kansas Department of Revenue collects the tax, the proceeds are returned to the cities or counties, except for a two percent processing fee. In Wichita the rate is six percent.
In some cases, jurisdictions may levy additional taxes that may not be paid to the Kansas Department of Revenue. This is the case with the Wichita city tourism fee, which took effect on January 1, 2015. This tax of 2.75% is paid directly to the city1, so it doesn’t appear in KDOR figures.
Also, jurisdictions may change the tax rate. The Kansas Department of Revenue maintains a list of taxes charged. 2
The visualization has three views of data. One is a table of collections, including percent change from the previous year. A line chart shows the dollar amount of collections. A second line chart shows collections indexed to a common starting point. This is useful for comparing the relative change in guest tax collections. These line charts show data as the average of the previous 12 months.
This data does not represent all hotels in Kansas. Confidentiality rules prohibit disclosure when a jurisdiction has a small number of hotels. In the nearby example, the value “C” is reported for Sedgwick County, indicating such non-disclosure. Obviously, there are hotels in Sedgwick County. But considering hotels in Sedgwick County that are not located in cities like Wichita, the number is too small to report, based on confidentiality guidelines. Similarly, for small cities, data is probably not available to the public.
Of note, while Wichita is the largest city in Kansas, Overland Park collects the most hotel guest tax. Of the largest markets in Kansas, Wichita has experienced the least growth in hotel tax collections since 2010.
In this episode of WichitaLiberty.TV: Karl Peterjohn and Bob Weeks continue discussing Century II, Wichita’s convention and performing arts center. But first, some unfortunate economic news for Wichita. View below, or click here to view at YouTube. Episode 166, broadcast September 24, 2017.
Wichita economic development efforts viewed in context.
Greater Wichita Partnership is the organization with primary responsibility for economic development in the Wichita area. Data provided by GWP shows that since 2004, GWP takes credit for creating an average 1,847 jobs per year through its economic development efforts. 1
To determine whether this is an impressive amount, we need context.
Over the past ten years the labor force for the Wichita MSA has averaged 314,877 each month (in May 2017 it was 306,809), and there were an average of 295,785 people working each month (May 2017 value was 293,763).
So one level of context is that the jobs for which GWP credits itself amount to 1,847 of 295,785 jobs, or 0.6 percent of the number of people working.
Another way to look at this level of job creation is to consider it in relation to the number of hires. Over the past ten years, the national average monthly rate of hires is about 3.4 percent, meaning that each month 3.4 percent of jobs have a new person filling them, or the jobs are newly-created. With an average of 295,785 people working in the Wichita MSA each month, this means that about 10,057 jobs have a new worker, each month. That’s 120,684 per year. With GWP taking credit for 1,847 jobs, this means that GWP’s efforts are responsible for 1.5 percent of the new hires each year.
Another context: Employment in the Wichita MSA reached a peak of 312,100 in July 2008. In June 2017 it was 298,800. To get back to the peak, Wichita needs 13,300 new jobs. At the GWP rate of 1,847 per year, it will take seven more years to recover.
All this shows that the efforts of our economic development machinery are responsible for small proportions of the jobs we need to create. This assumes that the data regarding jobs and investment that GWP provides is correct.
Here’s one example of problems with the data GWP provides. GWP reported that companies made investments of $1.2 billion in 2016 when the average for years before that was $138 million. That looks like an impressive jump. This figure, however, contains over one billion dollars of investment by Spirit Aerosystems projected to occur over the next five years. Not in 2016, but possible over the next five years. Yet GWP presents this investment as through it occurred in 2016.
Furthermore, when Spirit asked the city for authority to issue $280 bonds over five years, it told the city this would result in 349 new jobs over the same time period. That’s creating jobs at the rate of 70 per year. These jobs are welcome, but we need thousands of jobs per year. 2
Does GWP deserve credit? GWP says, “We only incorporate data and dollar amounts from projects which we helped attract, retain or expand; we do not include announcements that we have not assisted with.” 3 “Helped” and “assisted” are not very precise. How much “help” did Spirit need to decide to remain in Wichita, except for hundreds of millions of dollars in forgiven taxes? That is something the people of Wichita pay for, not GWP.
We must also be concerned about the reliability of GWP statistics. Earlier this year GWP was prominently promoting on its website the success of NetApp, a technology company. The problem is that NetApp never met the job creation numbers GWP promoted, and in fact, had been downsizing its Wichita operations. 4
Still, GWP promoted NetApp as a success. An important question is, the NetApp jobs that were announced but never created: Are they included in the jobs and investment totals GWP provides? We don’t know, because GWP will not disclose the data used to build its report.
There are other instances of GWP’s predecessor, Greater Wichita Economic Development Coalition (GWEDC), promoting Wichita as home to companies that had closed their Wichita facilities, or were in the process of closing. 5
GWP also promotes this on its website: “Downtown Wichita is work central, boasting 26,000 daytime workers in the financial, healthcare, education, oil & gas and creative services industries.” This claim of 26,000 workers is based on blatant misuse and misrepresentation of U.S. Census data, and GWP leadership has known of this for several months. 6 Still, the use of incorrect data remains.
Capacity to create
When the Wichita area offered incentives to a company that planned to add 50 jobs, the president of the chamber of commerce told commissioners that staff worked very hard to acquire these jobs. He called it “a great moment” in economic development. 7 But 50 jobs, while welcome, is just a drop in the bucket compared to what Wichita needs.
For Spirit to create 349 jobs over five years, we must let the company escape paying property tax and sales tax on $280 million of property.
For BG Products to add 11 well-paying jobs, we must let them avoid paying $204,280 per year in property taxes and $368,417 in sales tax.
In order to prepare the incentives package for another company, several events took place. There was a visit to the company. Then another visit and tour. Then economic development officials helped the company apply for benefits from the Kansas Department of Commerce. Then these officials worked closely with Wichita city staff on an incentive package. City documents stated that the expansion will create 28 jobs over the next five years. Obtaining these jobs took a lot of effort from Wichita and Kansas economic development machinery. Multiple agencies and fleets of bureaucrats at GWEDC, the City of Wichita, Sedgwick County, and the State of Kansas were involved. Wichita State University had to be involved. All this to create 5.6 jobs per year for five years.
This illustrates a capacity problem. Acquiring these jobs took a lot of bureaucratic effort, which has a cost. It required expensive incentives. Occasionally the city works with a large number of jobs, as in the recent case of Cargill. But those jobs required many expensive incentives, and no jobs were created. The incentives and effort were spent simply to persuade Cargill to remain in Wichita instead of moving elsewhere.
All this assumes, of course, that the incentives are necessary. Either that, or there is a larger problem. If companies can’t afford to make investments in Wichita unless they receive exemptions from paying taxes, we must conclude that taxes are too high. It’s either that, or these companies simply don’t want to participate in paying for the cost of government like most other companies and people do.
Civic leaders say that our economic development policies must be reformed. So far that isn’t happening. Our leaders say that we will no longer use cash incentives. But cash incentives like forgivable loans were a minor part of the incentives Wichita and the State of Kansas used. Furthermore, forgiveness of taxes is just as good as receiving cash. 8
The large amount of bureaucratic effort and cost spent to obtain relatively small numbers of jobs lets us know that we need to do something else to grow our local economy. We need to create a dynamic economy, focusing our efforts on creating an environment where growth can occur organically without management by government. Dr. Art Hall’s paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy provides much more information on the need for this. 9
In particular, Hall writes: “Embracing dynamism starts with a change in vision. Simply stated, the state government of Kansas should abandon its prevailing policy vision of the State as an active investor in businesses or industries and instead adopt the policy vision of the State as a caretaker of a competitive ‘platform’ — a platform that seeks to induce as much commercial experimentation as possible.” But our economic development policies are that of an “active investor,” and the cost of incentives increases the cost of experimentation.
Another thing we can do to help organically grow our economy and jobs is to reform our local regulatory regime.Kansas Policy Institute released a study of regulation and its impact at the state and local level. This is different from most investigations of regulation, as they usually focus on regulation at the federal level.
The study is titled “Business Perceptions of the Economic Impact of State and Local Government Regulation.” It was conducted by the Hugo Wall School of Public Affairs at Wichita State University. Click here to view the entire document.
Following is an excerpt from the introduction by James Franko, Vice President and Policy Director at Kansas Policy Institute. It points to a path forward.
Surprising to some, the businesses interviewed did not have as much of a problem with the regulations themselves, or the need for regulations, but with their application and enforcement. Across industries and focus group sessions the key themes were clear — give businesses transparency in what regulations are being applied, how they are employed, provide flexibility in meeting those goals, and allow an opportunity for compliance.
Sometimes things can be said so often as to lose their punch and become little more than the platitudes referenced above. The findings from Hugo Wall are clear that businesses will adapt and comply with regulations if they are transparent and accountable. Many in the public can be forgiven for thinking this was already the case. Thankfully, local and state governments can ensure this happens with minimal additional expense.
A transparent and accountable regulatory regime should be considered the “low hanging fruit” of government. Individuals and communities will always land on different places along the continuum of appropriate regulation. And, a give and take will always exist between regulators and the regulated. Those two truisms, however, should do nothing to undermine the need for regulations to be applied equally, based on clear rules and interpretations, and to give each business an opportunity to comply. (emphasis added)
Creating a dynamic economy and a reformed regulatory regime should cost very little. The benefits would apply to all companies — large or small, startup or established, local or relocations, in any industry.
Our civic leaders say that our economic development efforts must be reformed. Will the path forward be a dynamic economy and reformed regulation? Or will it be more bureaucracy, chasing jobs a handful at a time?
Greater Wichita Partnership – 2017 Investment Request. Part of the February 15, 2017 Sedgwick County Commission meeting. Available at https://goo.gl/hk6RHB. ↩
“Spirit is now requesting a new Letter of Intent (LOI) to issues IRBs in an amount not to exceed $280,000,000 for a period of five years. … Spirit projects it will create 349 new jobs over the next five years as a result of these expansions. In addition to the $280,000,000 Spirit expects to invest in facilities over the next five years, it also projects approximately $825,000,000 of capital investment in new machinery and equipment for a total capital investment in excess of $1 billion dollars.” Wichita City Council agenda packet for May 3, 2016. ↩
Personal correspondence from Andrew Nave, GWP executive vice president of economic development. ↩
Is it equitable for business firms to pay no sales tax, while low-income families pay sales tax on groceries?
Last week I wondered if the city’s agenda packet for economic development incentives proposed for BG Products was complete. 1 Since the city’s narrative had no mention of a sales tax exemption, but the accompanying ordinance that was passed authorized a sales tax exemption, I wondered if the analysis performed by the Wichita State University Center for Economic Development and Business Research was correct.
Now that I’ve received the document, it appears that CEDBR’s analysis properly included the cost of the sales tax exemption incentive. 2 The city’s narrative did not mention the sales tax exemption.
According to the CEDBR analysis, the sales tax exemption has a cost of $368,417. It is shared among the city, county and state, with 88 percent born by the state. 3
From a public policy perspective, we must wonder whether this incentive, and the other incentives BG Products received, are necessary for the company to proceed with its expansion in Wichita. The Industrial Revenue Bond program, which is the enabler of these incentives, does not require the applicant companies to demonstrate financial need. There are a few requirements, but none have to do with economic or financial necessity. 4
The State of Kansas applies the full sales tax rate to groceries, and is one of the few states to do this. 5 This tax disproportionally harms low-income families. 6 This is a problem in equity, in that business firms may request sales tax exemptions without showing need, while low-income families have no way to avoid the sales tax on their groceries.
From the analysis performed by the city by Center for Economic Development and Business Research at Wichita State University, these are the values of the sales tax incentives:
With the sales tax rate of 7.50%, this implies taxable spending of $4,912,227. ↩
“The percentage of taxes abated is based on capital investment and job creation. Majority of goods or services sold must be destined for customers outside of the Wichita Metropolitan Statistical Area (MSA). Company must pay average wages equal to or greater than the industry or Wichita MSA wage rate. City benefit/cost ration must be at least 1.3 to 1.” City of Wichita, Economic Development Incentives. Available at http://www.wichita.gov/Economic/Pages/Incentives.aspx. ↩
The report produced for the City of Wichita on Century II has a disclaimer that absolves pretty much everyone from any accountability.
The document is titled “Funding and Delivery Options Analysis for the Century II Facility Expansion: Delivery and Funding Strategy.” It was produced by Arup Advisory Inc. at a cost to the city of $294,000. The entire document is available at https://goo.gl/hq9iqR.
Following is the disclaimer at the front of the report. It is typical of what is found in reports produced by economic development consultants. It establishes several large loopholes for Arup, the City of Wichita, and boosters of public spending on downtown like Wichita Downtown Development Corporation and the Chamber of Commerce.
Current accepted professional practices and procedures were used in the development of this report. However, as with any forecast, there may be differences between forecasted and actual results. The report contains reasonable assumptions, estimates, and projections that may not be indicative of actual or future values or events and are therefore subject to substantial uncertainty. Future developments cannot be predicted with certainty, and this may affect the estimates or projections expressed in this report, consequently Arup specifically does not guarantee or warrant any estimate or projections contained in this report.
This document is intended only for the information of the City. It is not intended for and should not be relied upon by any third party, and no responsibility is undertaken to any third party.
Our findings are based on limited technical, financial, and commercial data concerning the project and its potential delivery options. Arup has relied upon the reasonable assurances of independent parties and is not aware of any facts that would make such information misleading.
We must emphasize that the realization of any prospective financial information set out within our report is dependent on the continuing validity of the assumptions on which it is based. We accept no responsibility for the realization of the prospective financial information. Actual results are likely to be different from those shown in the prospective financial information because events and circumstances frequently do not occur as expected, and the differences may be material.