In this episode of WichitaLiberty.TV: Kansas Director of Budget Shawn Sullivan joins Karl Peterjohn and Bob Weeks to explain issues related to the Kansas budget. View below, or click here to view at YouTube. Episode 142, broadcast March 12, 2017.
Despite years of purported budget cuts, the Wichita public school district has been able to improve or maintain student/teacher ratios.
When discussing school funding, there is controversy over how spending should be measured. What funds are included? Is KPERS included? Should we adjust for enrollment and inflation? What about bond and interest funds and capital outlay?
The largest expenditures of schools — some 80 percent nationwide — is personnel costs. In Kansas, and Wichita in particular, we’re told that budget cuts are causing school class sizes to increase.
When we look at numbers, we see that the Wichita school district has — over the long term — been able to maintain or reduce its student/teacher ratios. (Student/teacher ratio is not the same statistic as class size.) There have been a few ups and downs along the way, but for all three school levels, the ratios are lower or nearly the same than they were ten years ago. (Click charts for larger versions.)
This means that Wichita schools have been able to increase employment of teachers at a faster rate than enrollment has risen.
So however spending is categorized in funds, whether KPERS contributions are included or not, whether the funding comes from state or local sources, whether spending is adjusted for inflation, the Wichita school district has been able to improve or maintain its student/teacher ratios.
Data is from USD 259 Comprehensive Annual Financial Report for 2016, Miscellaneous Statistics, page 118, and CAFR from other years.
Considering all state and local government employees in proportion to population, Kansas has many, compared to other states, and especially so in education.
When considering all state and local government employees, Kansas spent $254 per person on payroll (March only).1 This was 15th highest among the states, District of Columbia, and the nation as a whole. There were 14.9 citizens for each FTE (full-time equivalent employee), which ranks fourth highest.
In other words, Kansas has many government employees compared to other states, and these employees are costly, again compared to other states. This is data from the U.S. Census Bureau for 2015, the most recent year for which data is available.
When considering all elementary and secondary education employees, Kansas spent $95 per person on payroll (again, March only). This was 12th highest among the states, District of Columbia, and the nation as a whole. There were 34.3 citizens for each FTE (full-time equivalent employee) working in elementary and secondary education, which ranks third highest.
In other words, Kansas has many elementary and secondary education employees compared to other states, and these employees are costly, again compared to other states.
Similar results are found for higher education employees. Fortunately, Kansas has zero employees working in state-owned liquor stores.
In the visualization you may create your own tables. Click here to access the visualization. Source of data is U.S. Census Bureau2 and author’s calculations to derive per-capita figures. Visualization created using tableau Public.
For total payroll (both full-time and part-time employees), the Census Bureau reports a value for a single month, that being March. ↩
The National Association of State Budget Officers publishes spending data for the states. In this interactive visualization, I present the data in a graphical and flexible format.
Data for each state is subdivided by fund (see below for definitions). Data through 2015 is actual, while data for fiscal year 2016 is estimated. The figures for the “state” United States were computed by summing the spending in all states, then dividing by the U.S. population. These figures are not adjusted for inflation.
In the example from the visualization that is shown below, we see general fund spending for Kansas and selected states. Note that general fund spending on a per-capita basis in Kansas is higher than in Oklahoma, Colorado, and Missouri, and approximately the same as Texas. When using the visualization you may select states, funds, and time periods to create your own comparisons. Because the visualization is interactive, you can do things like clicking on legends to highlight data series.
Of note is the tab comparing spending in states that have an income tax vs. those that have no income tax. Click here to access the visualization.
From NASBO, definitions of the funds.
General Fund: The predominant fund for financing a state’s operations. Revenues are received from broad-based state taxes. However, there are differences in how specific functions are financed from state to state.
Federal Funds: Funds received directly from the federal government.
Other State Funds: Expenditures from revenue sources that are restricted by law for particular governmental functions or activities. For example, a gasoline tax dedicated to a highway trust fund would appear in the “Other State Funds” column. For higher education, other state funds can include tuition and fees. For Medicaid, other state funds include provider taxes, fees, donations, assessments, and local funds.
Bonds: Expenditures from the sale of bonds, generally for capital projects.
State Funds: General funds plus other state fund spending, excluding state spending from bonds.
Some Kansas Senators were refreshingly honest about a recent tax bill: They’re coming back for more.
On February 17, 2107, the Kansas Senate voted to pass HB 2178, titled “Substitute for HB 2178 – Concerning income taxation; relating to determination of Kansas adjusted gross income, rates, itemized deductions.” The effect of the bill was to increase taxes.
The vote prevailed 22 to 18. Governor Brownback vetoed the bill. The House overrode the veto, but the Senate did not, with 24 senators voting to override the veto. Two-thirds, or 27 votes, were required.
In explanations of the February 17 vote, some Kansas Senators were honest about their beliefs and their future plans. Which are: First, the bill didn’t raise enough money to suit them. Second: Despite the passage of the bill, they’re coming back for more. (These remarks were made before the Governor’s veto.) Here’s Lynn Rogers, joined by two other senators (emphasis added):
Mr Vice President: This bill does not solve Kansas’ budget problem. It is the best start we have seen in 4 years. But it does not address our borrowing from the Bank of KDOT or KPERS, nor does it address our school finance needs. I appreciate adding the 3rd bracket and closing the LLC loophole. However, the weight of the bill is still on the backs of middle class families. Many of us campaigned on a platform of “fixing Topeka.” Kansans overwhelmingly asked us to work together. I was sorely disappointed in yesterday’s behavior. I am willing to support this as the best we have today. But I warn us all, we will have to return to this chamber to readdress our fiscal state. — LYNN ROGERS
Senators Faust-Goudeau and Francisco request the record to show they concur with the “Explanation of Vote” offered by Senator Rogers on Sub HB 2178.
Also, Marci Francisco, again joined by two others (emphasis added):
Mr. Vice President: I initially voted “Pass” but change my vote to “AYE” on Sub HB 2178. I appreciate the work done in the House to craft a tax bill to eliminate the non-wage income “loophole”, repeal the future formulaic income tax reductions, and second tier for married individuals filing jointly and earning over $30,000 at 5.25%, higher than the current rate of 4.6%. It sets the third tier for married individuals earning over $100,000 at 5.45%, only .2% higher and a full percentage point less than it was in 2012, putting more of the burden on low and middle income Kansans. It continues to make our Kansas tax form complicated because it does not reinstate the deductions for mortgage interest and property tax allowed for on the federal tax form. The bill does not raise enough revenue to balance the current budget. None the less, I vote “AYE” to support this as a first step in this legislative session. I also pledge to continue to work on proposals to bring fairness to the Kansas tax structure and an appropriate amount of revenue to the state. — MARCI FRANCISCO
Senators Kelly and Pettey request the record to show they concur with the “Explanation of Vote” offered by Senator Francisco on Sub HB 2178.
Data and charts regarding the Kansas general fund.
“The State General Fund receives the most attention in the budget because it is the largest source of the uncommitted revenue available to the state. It is also the fund to which most general tax receipts are credited. The Legislature may spend State General Fund dollars for any governmental purpose.”1
There is a requirement that the general fund have an ending balance of at least 7.5 percent. “Legislation was enacted by the 1990 Legislature to establish minimum ending balances to ensure financial solvency and fiscal responsibility. The legislation requires an ending balance of at least 7.5 percent of total expenditures and demand transfers and requires that the Governor’s budget recommendations and the legislative-approved budget for the coming year adhere to this standard. Often the Legislature suspends this requirement and allows for lower ending balances.”2
“The budget is based on an estimate of annual receipts and the Governor’s recommendation for total expenditures over the course of a fiscal year. However, within any fiscal year, the amount of receipts to the State General Fund varies widely from month to month, and an agency may spend any or all of its appropriation at any time during the fiscal year. In particular, the state must make large expenditures early in the fiscal year for school districts, while meeting the demands for periodic Medicaid reimbursements to providers, as well as making payroll. This makes for an imbalance when compared to when much of the state’s tax revenues are received, such as income tax, mostly recorded in the final quarter of the fiscal year.”3
“Estimates for the State General Fund are developed using a consensus process that involves the Division of the Budget, the Legislative Research Department, the Department of Revenue, and consulting economists from state universities.”4
The sources of data for the following charts and tables are Kansas Budget Reports and Comparison Reports for various years. Figures for fiscal years greater than 2016 are estimates from the Kansas Division of the Budget. Click charts for larger versions.
Kansas Division of the Budget. The Governor’s Budget Report Volume 1, Fiscal Year 2018.http://budget.ks.gov/. ↩
In this episode of WichitaLiberty.TV: Co-host Karl Peterjohn joins Bob Weeks to discuss the Kansas congressional nominating conventions, taxing and spending in Topeka, and Wichita economic development and promotion. View below, or click here to view at YouTube. Episode 139, broadcast February 19, 2017.
In this episode of WichitaLiberty.TV: Should Sedgwick County be in competition with the private sector? What are attitudes towards taxation and spending in Kansas? Finally, what is it like to request data from the City of Wichita? View below, or click here to view at YouTube. Episode 138, broadcast February 12, 2017.
Tanner is Senior Fellow at Cato Institute. The bill in question is HB 2064, titled “Establishing the KanCare bridge to a healthy Kansas program.” It would expand Medicaid eligibility to more people in Kansas. These quoted remarks are from Tanner’s written testimony, which may be read at Should Kansas Expand Its Medicaid Coverage.
As to the cost of Medicaid expansion, Tanner wrote: “Second, while such estimates are concerning enough in themselves, and would almost certainly require a substantial tax hike to finance, there is ample reason to believe that they understate the actual cost. For example, actual enrollments following expansion have exceeded estimates in every state that has expanded Medicaid under the ACA, in most cases by double digits and in some cases by more than 100 percent. In neighboring Colorado, the maximum projected enrollment was 187,000 and as of October of last year enrollment had exceeded 446,000. … In addition, the per enrollee cost has risen faster than predicted.”
Then, there’s the woodwork effect, which costs are covered only at the regular Medicaid reimbursement rate, not the 94 percent citizens might be tempted to believe: “Third, while it may be tempting to focus on the 94 percent FMAP [Federal Medical Assistance Percentage] for newly eligible adults, you should keep in mind that many of those who enroll under expansion will not fall into this category. Rather, they will be previously eligible individuals or families that are lured into the system through the publicity and outreach efforts surrounding expansion. The Robert Wood Johnson Foundation and the Urban Institute have dubbed this the ‘woodwork effect.’ Woodwork enrollees are not eligible for the enhanced FMAP. Instead, Kansas will have to pay 43.79 percent. In states that have expanded Medicaid under ACA, as much as half or more of those who signed up have fallen into this woodwork category.”
Tanner also noted the uncertainty over the future of the Affordable Care Act, or Obamacare, under the Trump Administration, warning legislators, “You may well be locking yourselves into future spending based on hopes for federal dollars that may never materialize.”
He also noted the studies that have found that being on Medicaid does not result in very good health outcomes, most notable in the Oregon study.
A statewide poll finds little support for raising taxes as a way to balance the Kansas budget.
Kansas Policy Institute has commissioned another public opinion poll gauging the preferences of Kansans. The poll released this week asked questions about how to balance the budget in the current year and next year, raising the gasoline tax, schools, paying for Medicaid, and voting on local tax increases.
In a press release announcing poll results, KPI president Dave Trabert noted, “Once again, scientific public opinion surveys show that special interests pushing for enormous, record-setting tax increases are completely out of step with the general public. Kansans expect government and school districts to make efficient use of their tax dollars. They don’t want their income taxes or gasoline taxes increased. The question is whether legislators will listen to citizens or special interests that want higher taxes for more spending.”
Some may recognize a discrepancy between the results of this poll with last year’s elections for the Kansas House and Senate. Those elections have been widely interpreted as a referendum against an unpopular governor and his policies. This poll, however, finds little support for raising the taxes that the governor and legislature cut.
A possible explanation is that in elections for office, voters are selecting people to serve in office. Voters must choose candidate A or candidate B (or maybe C or D). Voters must take the entire package of positions associated with a candidate. It isn’t possible to select some positions from candidate A, and others from candidate B.
But in a poll with specific and narrow questions, voters can express their preferences with more precision.
There’s a difference between voting for politicians and voting for — or expressing preference for — specific policies and issues. When given a chance, Wichitans have often voted contrary to the wishes of the city council, city hall bureaucrats, and Wichita’s political class. Whether a special tax giveaway to a hotel, a general sales tax increase, reduction of penalties for marijuana possession, or fluoridation of water: Wichitans voted in opposition to the policies that were supported by the people they voted to place in office.
KPI’s fifth annual Public Education Fact Book is a one-stop shop for data on public school information from The Sunflower State. Numerous scientific surveys show that citizens are grossly misinformed on many pertinent facts of public education in Kansas. Aid and spending per-pupil are much higher than many Kansans believe, and student achievement is lower than understood. This fact book series aims to rectify this situation.
This document is available to read online here, or contact KPI for a printed copy.
A records request to the City of Wichita results in data as well as insight into the city’s attitude towards empowering citizens with data.
As part of an ongoing transparency project, I asked the City of Wichita for check register data. I’ve made the data available in a visualization using Tableau Public. Click here to access the visualization.
Analyzing this data requires a bit of local knowledge. For example, there is a vendor named “Visit Wichita” that started to receive monthly payments in March 2015. What about payments for January and February? Those were made to a vendor named “Go Wichita,” which changed its name to “Visit Wichita.”
Similarly, there are payments made to both “Westar Energy” and “Westar Energy — EDI.” These are the same entities, just as “Visit Wichita” and “Go Wichita” are the same entity. To the city’s credit, the matching pairs have the same vendor number, which is good. But resolving this requires a different level of analysis.
There are interesting entries. For example, the city had been spending a few hundred dollars per month to the Kansas Turnpike Authority. Then in July 2015, the city paid $3.7 million to KTA. A quick search of city council agenda packets didn’t reveal any reason for this.
Of note, it looks like there were 1,475 checks issued in amounts $20 or less over a period of nearly two years. Bank of America has estimated that the total cost of sending a business check ranges from $4 to $20.
The records request
The city supplied this data in an Excel spreadsheet, in an arrangement that can easily be analyzed in Excel or loaded into other programs. This is a step forward. Three years ago, Wichita could supply data of limited utility. What was supplied to me was data in pdf form, and as images, not text. It would be difficult to translate the image data into machine-readable text, and even more difficult to reorganize it to a useful arrangement or format for analysis.
In 2015 had to pay $24.00 to the city for this data. That’s a problem. It is by now routine for governmental agencies to post spending data like this, but not at the City of Wichita. Upon inquiry, city officials told me that the present financial management system “does not include many modern system features such as an ‘open checkbook.’” An “open checkbook” refers to a modern web interface where citizens can query for specific data and perhaps perform other analysis. An example is Denver’s open checkbook.
While the next-generation Wichita financial system will probably have such a feature, there’s no reason why citizens can’t experience some of the benefits now. The spreadsheet of spending data like that I paid for could easily be posted on the city’s website on a monthly basis. People like myself will take that data and make it more useful, as I did. There is no reason why this should not be happening.
When I learned of the fee for these records in 2015, I asked for a waiver, sending this to the city’s records official:
I’d like to ask for a waiver of the requested fee. I ask this because check register data is an example of records that many governmental agencies make freely available on their websites. The Wichita Public School District and Sedgwick County are two local examples.
I’d like to also call attention to the U.S. Freedom of Information Act, which allows for fee waivers in some circumstances: “…fee waivers are limited to situations in which a requester can show that the disclosure of the requested information is in the public interest because it is likely to contribute significantly to public understanding of the operations and activities of the government and is not primarily in the commercial interest of the requester.”
I suggest that the records I am requesting will indeed “contribute significantly to public understanding of the operations and activities of the government,” and that it is in the public interest of the people of Wichita that these records be freely available.
I received an answer:
Your request for waiver of fees is denied. KORA allows fees to be collected prior to finding and producing the document you seek. KSA 45-218(f). The extensive statute setting out how fees are to be determined, KSA 45-219, does not contain any provision for waiver in the manner you suggest.
The City will provide the document to you upon payment as invoiced.
Jay C. Hinkel,
Deputy City Attorney
Mr. Hinkel is absolutely correct. Governmental agencies in Kansas have the right to charge for records, and the Kansas statutes do not mention the waiving of fees as do the federal statutes. But the Kansas Open Records Act does not require cities to charge for providing records, especially for records that the city should already be providing. Especially when citizens are willing to take that data and make it better, at no charge to the city.
(For the most recent records request, the city waived its intended fee of $24.00, noting this waiver is for the current request only. The city acknowledges that it temporarily misplaced my request, and as a result, was late in responding. I believe that is the reason for the fee waiver.)
Wichita’s attitutude, from top down
Hinkel provided a lawyer’s answer. Here, however, is the public policy the city promotes, from a Wichita city news release from 2013:
“The City Council has stressed the importance of transparency for this organization,” City Manager Robert Layton said. “We’re honored to receive a Sunny Award and we will continue to empower and engage citizens by providing information necessary to keep them informed on the actions their government is taking on their behalf.”
The importance of transparency. The city wants to empower and engage citizens by providing information. Well. I offered to “contribute significantly to public understanding of the operations and activities of the government,” but had to pay to do so.
When I asked city officials for clarification of why I had to pay to receive these records, communications staff told me: “I should note that the City has won multiple awards for openness and citizen participation, but City leaders recognize this work is never done. They strive each and every day to become more open and transparent and will continue to do so.”
I must disagree. This is not “open and transparent.” This is not how to “empower and engage” the people of Wichita. Not even close.
The city lags far behind comparable agencies in providing access to data. It’s been almost two years since the city expanded its staff by adding a Strategic Communications Director. It doesn’t seem that this has helped to provide information to citizens.
In this episode of WichitaLiberty.TV: Co-host Karl Peterjohn and Bob Weeks discuss technological progress, confirmation hearings, whether Kansas will trim spending or raise taxes, and Kansas fiscal nightmares. View below, or click here to view at YouTube. Episode 135, broadcast January 22, 2017.
An interactive visualization of spending for Kansas school districts.
The accompanying visualization holds both nominal dollar amounts and amounts adjusted to reflect 2016 dollars. Data includes state aid, local aid, federal aid, and total spending for each school district, both total and per pupil. The visualization includes both tables and charts.
For the school year ending in 2016, total spending per pupil was $13,015. This is down from an inflation-adjusted $13,222 for 2015, a decline of 1.56 percent. Considering state funding only, per-pupil funding for 2016 was $8,540, down from an inflation-adjusted $8,631 for 2016, a decline of 1.05 percent.
In fiscal year 2015 there was a shift in the way property tax revenue is reported, with revenue formerly counted as “local” being counted as “state.” One of the tabs in the visualization shows the sum of local and state values, which eliminates the effect of the change in reporting.
A look at actual spending on Kansas highways, apart from transfers.
When we look at actual spending on Kansas roads and highways, we see something different from what is commonly portrayed. Kansas Department of Transportation publishes a Comprehensive Annual Financial Report that details spending in four categories. These figures represent actual spending on roads and highways, independent of transfers to or from the highway fund.
Spending on “Preservation” has been rising, but fell last year.
Spending on “Expansion and Enhancement” has been rising.
Spending on “Maintenance” has been level, with a small decline.
Spending on “Modernization” has declined, then rose.
For these four categories — which represent the major share of KDOT spending on roads — spending in fiscal 2016 totaled $857.133 million. That’s down from $932.666 million the year before, and up from a low of $698.770 million in fiscal 2010.
Again, these are dollars actually spent on highway programs. A common characterization of the way Kansas government is funded is called “robbing the bank of KDOT.” To the extent that characterization is accurate, there is a separate line item titled “Distributions to other state funds” that holds these values. It appears in the nearby table.
Sales tax revenue to the highway fund
Kansas law specifies how much sales tax revenue is transferred to the highway fund. Here are recent rates of transfer and dates they became effective:1
July 1, 2010: 11.427%
July 1, 2011: 11.26%
July 1, 2012: 11.233%
July 1, 2013: 17.073%
July 1, 2015: 16.226%
July 1, 2016 and thereafter: 16.154%
A nearby chart shows the dollar amounts transferred to the highway fund from sales tax revenue. In 2006 the transfer was $98.914 million, and by 2016 it had grown to $517.698 million.
Proposals in the Kansas budget for fiscal year 2018 are more evidence of why defined-benefit pension plans are incompatible with the public sector.
Kansas Governor Sam Brownback has proposed delays in funding KPERS, the Kansas Public Employees Retirement System. The delays are in both directions. The state intends to break a past promise to pay, and also to skip some future payments.
A memo from KPERS summarizes recent history and the proposed changes: “Last fiscal year, the State delayed its fourth quarter payment for School employer contributions with a promise to pay it in Fiscal Year 2018 with interest. The Governor is recommending the State not pay this contribution and skip one quarterly payment each year through FY19. In addition, the Governor recommends extending the time to pay down KPERS’ existing unfunded actuarial liability by 10 years.”1
Many will criticize the proposed reduction in funding KPERS as stealing from KPERS. That really isn’t true. KPERS has plenty of money to pay current retirees their promised benefits. The above memo also says that those near retirement won’t be affected.
But what about younger employees who may not retire for 20 or 30 years? Will they receive their promised benefits?
The answer is yes, almost certainly. Their retirement benefits are in the form of a contract, and it is very unlikely that the state will break those contracts.
So: Is KPERS being robbed? Stolen from?
No. It’s future Kansas taxpayers who will be mugged. They will have to pay the unfunded liabilities accumulated by not only the current governor and legislature, but by past governors and legislatures too. I explain in more detail in my recent article No one is stealing* from KPERS. (The asterisk notes that there is stealing in a way, but from future taxpayers.)
Further: It is entirely foreseeable that this is happening. In 2015 the state issued $1 billion in bonds to address a portion of the KPERS unfunded liability. This made the unfunded liability ratio look better, and the governor and Republicans continually boast of this. But debt has simply been shifted from one balance sheet to another. The same taxpayers that will eventually pay.
This is one of the reasons why government should not offer defined-benefit pension plans. Because of the long time horizons involved, it’s easy to delay and postpone dealing with problems. Or, legislators are prone to make risky investment decisions as Kansas did in 2015 by $1 billion in bonds and transferring the proceeds to KPERS. This was — is — a risky maneuver, and it has led to undesirable behavior that was entirely predictable.
The plan was that the state would borrow $1 billion, and invest it. If the state earned more in investment returns than the interest cost on the bonds, the state wins. Barry Poulson, Ph.D., Emeritus Professor at the University of Colorado — Boulder has written on the danger of borrowing to shore up state pension funds, as Kansas has done. He explained there is the “lack of nexus between the investment of the bond proceeds and payments for unfunded liabilities in the plan.” This means that the borrowed funds may be used for current spending rather than for correcting the KPERS unfunded liability.2
Paulson explains: “If legislators see that additional funds are available to pay off unfunded liabilities in the pension plan they may choose to allocate less general fund money to meet these pension obligations.” What Poulson warned of happened in Kansas in 2016. Now, the governor proposes even more: Pushing off KPERS contributions to the future so that more money is available for spending on other stuff now.
In a way, it’s surprising that groups who advocate for public employees are upset with this. (See, for example, here from KNEA.) Instead, they should be grateful. KPERS benefits are unlikely to be cut for any retirees. But underfunding KPERS today means there is more money available for public employees and the agencies that employ them. In reality, these groups simply want higher taxes now.
President-elect Donald Trump should learn from Kansas’s mistake on income-tax reduction: Don’t reduce revenue and increase spending. That’s the real problem with the Kansas budget (“Brownback Sees Kansas Tax Plan as Model for Nation,” U.S. News, Dec 24). There was never an expectation that spending wouldn’t have to be adjusted to accommodate revenue reductions, but Democrats and many Republicans refused to make government more efficient so spending and taxes were increased in 2013 and again in 2015. Kansas spent 27% more per resident in 2015 than the states without an income tax.
The income-tax exemption on pass-through income for proprietorships, partnerships, Sub-S corporations and LLCs is paying real dividends. U.S. Census data show that pass-through businesses actually created the majority of new jobs in 2013 and 2014 (the most recent data for employment by legal organization). And while Kansas continues its decades-long tradition of trailing the national average on job growth, Kansas is performing closer to the average since taxes were reduced.
Census data also show employment for pass-through entities is almost at parity with C corporations in the U.S., and cutting the corporate income tax affects only about half of the business employment base. Pass-through business profits are taxable to the individual owners, so individual rates must also be reduced to really help the economy.
Kansas Policy Institute
Overland Park, Kan.
In Wichita, it turns out we have to sell a hotel in order to fix our streets.
Update: The Council approved these projects.
In September the Wichita City Council decided to sell the Hyatt Regency hotel in downtown Wichita for $20 million. Now the council will consider two proposals for spending this money.
One proposal is to spend $10 million on street repair, called “one-time pavement maintenance projects” in city documents.1
A second proposal is to spend $4 million on transit over the next four years. This is pitched as sort of a “bridge to sustainability.” That is, if the Wichita transit system can make it through the next four years, it can — somehow — become sustainable. The plan contains idea like this: “Extensive public education will be used to build ridership. Transit information will be available to a wider audience. Potential users will be engaged in more one-on-one manner.”2
Whatever the merits of these spending programs, Wichita is taking a capital asset and using it to fund current spending. In particular, street maintenance needs to be performed continuously. Here, the city has not been taking care of streets that taxpayers paid for and entrusted to the city for care. It turns out we have to sell a hotel in order to fix our streets. But street maintenance is something that needs to be performed — and paid for — every year. We shouldn’t have to rely on a sale of a capital asset to fund daily needs.
Following, from October, what the city should do with the Hyatt proceeds.
Wichita, give back the Hyatt proceeds
Instead of spending the proceeds of the Hyatt hotel sale, the city should honor those who paid for the hotel — the city’s taxpayers.
The City of Wichita has sold the Hyatt Regency Hotel for $20 million. Now, what should the city do with these funds? In a workshop this week, the city manager and council recognized that these funds should not be used for operating purposes. This is important. The Hyatt Hotel was paid for with long-term debt, which the city says has been retired. The proceeds from this sale should be used in a similar way: For long-term capital investment, not day-to-day operating expenses. But the council heard two proposals that are decidedly more like operating expenses rather than capital investment.
One proposal, presented by Public Works Director Alan King, is to spend $10 million on street repair over two years. Part of that expense is to purchase a new truck, which is a capital, not operating, expense. But King later revealed that the truck could be purchased out of the existing capital budget.
Street maintenance, however, is an operating expense.
A second proposal, from the Wichita Transit System, would use about $4 million to sustain and improve current bus service. It was presented to the council as a “bridge to a long term solution.”
This, too, is an operating expense.
As these proposals were presented in a workshop, no decision was made.
These two proposed uses of the $20 million Hyatt sales proceeds are contrary to the goal of not using the funds for operating purposes. If the city decides to use the sales proceeds in this way, a capital investment will have been sold in order to pay for day-to-day expenses.
Instead of spending on these two projects, the city should simply return the money to those who paid for the Hyatt in the first place. Those people are, of course, the taxpayers of Wichita. It would be difficult to give back the funds to individual taxpayers in proportion to the amount they supplied. So what the city should do is retire $20 million of the city’s long-term debt.
If not that, then the city should use the Hyatt proceeds to pay for another long-lived asset, perhaps the new downtown library. Either of these alternatives respects the principles of sound financial practice, and also respects the taxpayers.
City of Wichita. Agenda for December 20, 2016. Agenda Item No. IV-2. ↩
City of Wichita. Agenda for December 20, 2016. Agenda Item No. IV-3. ↩
The evaluation of economic development incentives in Wichita and Kansas requires thinking at the margin, not the entirety.
When considering the effect of economic development incentives, cities like Wichita use a benefit-cost analysis to determine whether the incentive is in the best interests of the city. The analysis usually also considers the county, state, and school districts (although these jurisdictions have no say over whether the incentive is granted, with a few exceptions). The idea is that by paying money now or forgiving future taxes, the city gains even more in increased tax collections. This is then pitched as a good deal for taxpayers: The city gets more jobs (usually) and a “profit,” too.
Economic activity usually generates tax revenue that flows to governmental agencies. When people work, they pay income taxes. When they make purchases, they pay sales taxes. When they buy existing property or create new property, they pay property taxes. This happens whether or not the economic activity is a result of government incentives. This is a key point that deserves more exploration.
But there are a few problems with the arguments that cities, states, and their economic development agencies promote. One is that the increase in tax revenue happens regardless of whether the company has received incentives. Therefore, the benefit-cost ratio calculations are valid only if incentives were absolutely necessary. Otherwise, government claims credit for something that was going to happen anyway. This is a big question that deserves exploration.
For example, what about all the companies that locate to Wichita, or expand in Wichita, or simply remain in Wichita without receiving incentives? How do we calculate the benefit-cost ratio when a company receives no incentives? The answer is it can’t be calculated, as there is no government cost, so the divisor in the equation is zero. Instead, there is only benefit.
Then, we don’t often ask why some companies need incentives, and others do not. Do the companies that receive incentives really need them? Is it really true that a business investment is not feasible without subsidy? Why do some companies receive incentives multiple times while others thrive without incentives?
We may never know
We may never know the answer to these questions. Here’s why. Suppose fictional company XYZ Enterprises, Inc. dangles the idea of moving from Wichita to some other city. XYZ cites incentive packages offered by other cities. Wichita and the state then come up with millions in incentives, and XYZ decides to remain in Wichita. Question: Were the incentives necessary? Was the threat to move genuine? If XYZ admits the threat was not real, then it has falsely held Wichita and Kansas hostage for incentives. If the city or state admits the threat was not real, then citizens wonder why government gave away so much.2
So we’ll never really know. Everyone involved has incentive to maintain the fiction and avoid letting the truth leak out.
A small lever moves big boulders, they say
Related is that jurisdictions may grant relatively small incentives and then take credit for the entire deal. I’ve been told that when economic development agencies learn of a company moving to an area or expanding their Wichita operations, they swoop in with small incentives and take credit for the entire deal. The agency is then able to point to a small incentive and take credit for the entire deal. As you can imagine, it’s difficult to get the involved parties to speak on the record about this.
Further, governments may not credit the contribution of other governments. In the past when the Wichita economic development office presented information about an incentive it proposed to offer to a company, it would sometimes list the incentives the company is receiving from other governments. As an example, when the city offered incentives to NetApp in 2012, the city’s contribution was given as a maximum of $418,000. The agenda material mentioned — obliquely — that the State of Kansas was involved in the incentive package. Inquiry to the Kansas Department of Commerce revealed that the state had promoted incentives worth $35,160,017 to NetApp.3 Wichita’s incentive contribution is just 1.2 percent of what the state offered, which makes us wonder if the Wichita incentive was truly needed. Nonetheless, Wichita city officials spoke as though the city alone was responsible for NetApp’s decision.
The importance of marginal thinking
When evaluating economic development incentives, we often fail to properly evaluate the marginal gains. Here’s an example of the importance of looking at marginal gains rather than the whole. In 2012, the City of Wichita developed a program called New HOME (New Home Ownership Made Easy). The crux of the program is to rebate Wichita city property taxes for five years to those who buy newly-built homes in certain neighborhoods under certain conditions.
The important question is how much new activity this program will induce. Often government takes credit for all economic activity that takes place. This ignores the economic activity that was going to take place naturally — in this case, new homes that are going to be built even without this subsidy program. According to data compiled by Wichita Area Builders Association and the WSU Center for Economic Development and Business Research — this is the data that was current at the time the Wichita city council made its decision to authorize the program — in 2011 462 new homes were started in the City of Wichita. The HOME program contemplated subsidizing 1,000 homes in a period of 22 months. That’s a rate of 545 homes per year — not much more than the present rate of 462 per year. But, the city has to give up collecting property tax on all these homes — even the ones that would be built anyway.
What we’re talking about is possibly inducing a small amount of additional activity over what would happen naturally and organically. But we have to subsidize a very large number of houses in order to achieve that. The lesson is that we need to evaluate the costs of this program based on the marginal activity it may induce, not all activity.
“But the Hawker Beechcraft deal is different, focused on saving existing jobs, not creating new jobs, and the result diverts millions in limited taxpayer funds, primarily state income tax revenues, from state coffers to a company’s benefit, simply to have an existing business stay put.” Flentje, Edward. Brinkmanship with jobs.https://wichitaliberty.org/economics/brinkmanship-with-jobs/. ↩
For more on this, see LeRoy, Greg. The Great American Jobs Scam. Especially chapter two, titled Site Location 101: How Companies Decide Where to Expand or Relocate. The entire book may be read online at http://www.greatamericanjobsscam.com/pages/preview-book.html. A relevant excerpt: “These prisoners’ dilemma games also enable companies to create fictions about cause and effect. These fictions can be used to create public versions of how deals happened that no one can credibly contradict, because the company’s real decision-making process will never be revealed. The most important fiction to maintain, of course, is that subsidies matter in deciding where a company expands or relocates. For example, being able to send secret signals to competing cities means companies can tell contradictory stories to different cities and have no fear of being exposed. If a company really has its heart set on City A, it can tell that city that it is in the hunt, but needs to do better. Meanwhile, it can send less urgent signals to Cities B and C, even if they offered bigger packages at first. Eventually, City A offers the biggest package, and the company announces its decision to go there.” ↩