A truthful accounting of the finances of Intrust Bank Arena in downtown Wichita shows a large loss.
The true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters cite a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and it hides the true economics of the arena. What’s missing is depreciation expense.
There are at least two ways of looking at the finance of the arena. Nearly all attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and ASM Global, a company that operates the arena. SMG, the former operator of the arena, merged with another company to form ASM Global.
This agreement specifies a revenue sharing mechanism between the county and ASM. For 2109, the accounting method used in this agreement produced a profit, or “net building income,” of $1,021,721 to be split (not equally) between SMG and the county. The county’s share was $310,861. (1)The Operations of INTRUST Bank Arena, as Managed by ASM Global. Independent Auditor’s Report and Special-Purpose Financial Statements. December 31, 2019. Available here.
While described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations in conformity with accounting principles generally accepted in the United States of America.” (2)Ibid, page 2.
That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.
A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2019 Comprehensive Annual Financial Report for Sedgwick County. (3)Sedgwick County. Comprehensive Annual Financial Report of the County of Sedgwick, Kansas for the Year ended December 31, 2019. Available at https://www.sedgwickcounty.org/finance/comprehensive-annual-financial-reports/. This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially last year. In that respect, it is a report card of our ability to manage our financial resources.”
Regarding the arena in 2019, the CAFR states:
The Arena Fund represents the activity of the INTRUST Bank Arena. The facility is operated by a private company; the County incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any, and naming rights fees. The Arena Fund had an operating loss of $5.0 million. The loss can be attributed to $5.0 million in depreciation expense.
Financial statements in the same document show that $4,993,361 was charged for depreciation in 2019. If we subtract the ASM payment to the county of $310,861 from depreciation expense, we learn that the Intrust Bank Arena lost $4,682,500 in 2019.
Depreciation expense is not something that is paid out in cash. That is, Sedgwick County did not write a check for $4,682,500 to pay depreciation expense. Instead, depreciation accounting provides a way to recognize and account for the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.
But not many of our civic leaders recognize this, at least publicly. We — frequently — observe our governmental and civic leaders telling us that we must “run government like a business.” The county’s financial report makes mention of this: “Sedgwick County has one business-type activity, the Arena fund. Net position for fiscal year 2019 decreased by $5.0 million to $146.6 million. Of that $146.6 million, $138.9 million is invested in capital assets. The decrease can be attributed to depreciation, which was $5.0 million.”(4)CAFR, page A-10. (emphasis added)
At the same time, these leaders avoid frank and realistic discussion of economic facts. As an example, in years past Commissioner Dave Unruh made remarks that illustrate the severe misunderstanding under which he and almost everyone labor regarding the nature of spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”
The contention — witting or not — is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) in the arena is merely a historical artifact, something that happened in the past, something that has no bearing today. There is no opportunity cost, according to this view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds. Since Kansas is one of the few states that adds sales tax to food, low-income households paid extra sales tax on their groceries to pay for the arena — an arena where they may not be able to afford tickets.
Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct that depreciation expense is not a cash expense that affects cash flow, it is an economic reality that can’t be ignored — except by politicians, apparently. The Wichita Eagle and Wichita Business Journal aid in promoting this deception.
The upshot: We’re evaluating government and making decisions based on incomplete and false information, just to gratify the egos of self-serving politicians and bureaucrats.
Reporting on Intrust Bank Arena financial data
In February 2015 the Wichita Eaglereported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time. Neither did the Eagle article.
In December 2014, in a look at the first five years of the arena, its manager told the Wichita Eagle this: “‘We know from a financial standpoint, the building has been successful. Every year, it’s always been in the black, and there are a lot of buildings that don’t have that, so it’s a great achievement,’ said A.J. Boleski, the arena’s general manager.”
The Wichita Eagle opinion page hasn’t been helpful, with Rhonda Holman opining with thoughts like this: “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.” (For some years, the county paid to create a large “check” for publicity purposes.)
That followed her op-ed from a year before, when she wrote: “And, of course, Intrust Bank Arena has the uncommon advantage among public facilities of having already been paid for, via a 30-month, 1 percent sales tax approved by voters in 2004 that actually went away as scheduled.” That thinking, of course, ignores the economic reality of depreciation.
In 2018, the Wichita Eagle reported, based on partial-year results: “Intrust Bank Arena remains profitable but is reporting a 20 percent drop in income this year, despite a bump from the NCAA March Madness basketball tournament. Net income for the first three quarters of this year was about $556,000. That’s down from just shy of $700,000 last year, according to a report to the Sedgwick County Commission.” (5)Lefler, Dion. Despite March Madness, Intrust Bank Arena profit down 20 percent. December 7, 2018. Available at https://www.kansas.com/news/politics-government/article222300675.html. This use of “profitable” is based only on the special revenue-sharing agreement, not generally accepted accounting principles.
Even our city’s business press — which ought to know better — writes headlines like Intrust Bank Arena tops $1.1M in net income for 2015 without mentioning depreciation expense or explaining the non-conforming accounting methods used to derive this number.
All of these examples are deficient in an important way: They contribute confusion to the search for truthful accounting of the arena’s finances. Recognizing depreciation expense is vital to understanding profit or loss, we’re not doing that.
The Operations of INTRUST Bank Arena, as Managed by ASM Global. Independent Auditor’s Report and Special-Purpose Financial Statements. December 31, 2019. Available here.
A report on the economic impact of the first ten years of operation of the Intrust Bank Arena in downtown Wichita incorrectly reported tax revenue.
Recently Intrust Bank Arena in downtown Wichita promoted the results of an analysis of the economic impact of the arena through its first ten years of operation. 1 The arena partnered with the Center for Economic Development and Business Research at Wichita State University to conduct the study. 2
In all, the report claims $2.7 million over ten years in Sedgwick County guest tax revenue paid by out-of-town arena visitors who stayed in local hotels. But while the county has a guest tax, it does not raise nearly the dollars shown in the report.
The transient guest tax, sometimes called a guest tax or bed tax, is a tax on a hotel bill. It is collected in addition to retail sales tax. In the City of Wichita, hotel guests pay 7.5 percent retail sales tax, an additional six percent guest tax, and an additional 2.75 percent city tourism fee. If the hotel is located within a Community Improvement District, an additional tax of up to two percent is collected.
The guest tax for Sedgwick County was last revised in 2006. 3 The rate is five percent. The ordinance says that the tax “… shall be levied in the unincorporated area of Sedgwick County, Kansas …”
The term unincorporated area is key, meaning the portions of the county that are not within an incorporated town or city. Reports from the Kansas Department of Revenue show there is just one establishment in Sedgwick County that files a guest tax report. 4 For comparison, 108 establishments in the City of Wichita file guest tax reports. These are located in the city limits and are not in the unincorporated area of the county, and therefore not subject to the county guest tax.
How much does Sedgwick County collect in guest tax? The reports from the Kansas Department of Revenue don’t say. The value is suppressed to protect confidentiality, given that there is just one filing establishment in the unincorporated area of the county.
We do know, according to the economic impact report, that the one hotel in unincorporated Sedgwick County collects $351,656 per year in guest tax (annualized over the period 2015 to 2019.) Since the guest tax rate is five percent, that implies $7 million in annual sales, which would be collected by a hotel selling 191 rooms per day at a rate of $100 per day, 365 days per year.
Is there such a hotel in unincorporated Sedgwick County? It’s unlikely. Consider this one hotel with $351,656 in guest tax collections by arena visitors compared to the $421,987 reported for all hotels in the City of Wichita, again for arena visitors. (The Wichita guest tax rate is slightly higher at six percent, so the comparison is not strictly equal.)
Remember: According to the analysis, this level of activity is generated just by visitors attending events at Intrust Bank Arena.
I think it’s safe to say there is a mistake. Correspondence with CEDBR, the organization that prepared the analysis, confirms that county guest tax was incorrectly estimated, and a new version reports $0 in county guest tax. 5 CEDBR says no numbers were changed other than the county guest tax and totals that included it.
While it is unfortunate that CEDBR made this mistake, the use of the analysis by downstream consumers teaches us something about economic development, the data supporting it, and its practitioners.
As an example, the management of Intrust Bank Arena issued a press release touting the analysis and its findings. Regarding tax collections, the announcement reports, “The fiscal impact of visitors to the area for INTRUST Bank Arena events that occurred in 2010-2019 was approximately $12 million in tax revenue generated.”
What’s interesting is that the release cites only the retail sales tax revenue. It omits the guest tax revenue, which is — according to the analysis that was available at the time of the press release — about $6 million. That’s half as much as the retail sales tax, but it was not included in a press release touting economic impact.
An excerpt from the first page of the CEDBR analysis. Click for larger.
Why didn’t the arena use the guest tax collections, thereby reporting $18 million in tax revenue collected from visitors rather than $12 million? It wasn’t due to concern over the accuracy of the guest tax collections, as arena management told me they were not aware of CEDBR’s error. But because the press release did not mention the erroneous guest tax, arena management says there is no need to correct the press release. This is correct, and it reveals the mistake in not including guest tax revenue.
Adding to our learning about the use of data in economic development is this: Of the sales tax collected by hotels in Wichita, about 87 percent belongs to the State of Kansas, with the remainder shared by Wichita and Sedgwick County. For guest tax, however, all is returned to the city, except for a small administrative fee of two percent. So of the $12 million in retail sales tax revenue promoted by arena management, about $1.5 million was shared by the city and county. 6 For the purported $6 million in guest tax revenue, all went to the city and county, except for the administrative fee.
We also learn about the diligence of Sedgwick County Commissioner Pete Meitzner (district 1) in examining this data. He is quoted in the arena’s press release. But it’s quite easy to see that the analysis erroneously reports county guest tax revenue.
Besides this mistake, there are other areas of concern regarding this analysis of the economic impact of the arena. One is that this report mentions revenue but not costs. 7
The second is that before Intrust Bank Arena opened in downtown, the county owned another arena. That former arena generated economic activity and economic impact, too, including NCAA men’s basketball tournament games. A thorough analysis should look at the marginal activity created by the new arena.
Sedgwick County. A charter resolution exempting Sedgwick County, Kansas, from the provisions of k.S.A. 12-1692, 12-1693, 12-1694, 12-1694a, 12-1695, and providing substitute and additional provisions on the same subject relating to the levy of a transient guest tax in the unincorporated area of Sedgwick County and providing for purposes of expenditure of such funds; and repealing charter resolution #32. Available at https://library.municode.com/ks/sedgwick_county/codes/code_of_ordinances?nodeId=SECOKACO_APXACHRE_NO._59. ↩
Specifically, the analysis reports $983,449 in sales tax to the city and $703,714 to the county, for a total of $1,687,163. ↩
It’s common for officials to talk as though there is no cost or expense in owning the arena, because a sales tax was used to pre-fund the arena. After the funds were in place, the arena was built. But, see Weeks, Bob. The finances of Intrust Bank Arena in Wichita. Available at https://wichitaliberty.org/sedgwick-county-government/the-finances-of-intrust-bank-arena-in-wichita/. For annual expenses, in a presentation to Sedgwick County Commissioners in February, county staff reported $1,991,471.99 in expenses charged to the arena’s reserve fund. This was offset by $722,933.65 in revenue, mostly from a revenue-sharing agreement with the arena’s operator and from the sale of naming rights. The declining balance in the arena’s reserve fund led Commissioner David Dennis to wonder if a special tax district could be established to provide more revenue to cover these expenses. See https://drive.google.com/file/d/1UbAfjQaIWQOzrYzIWqKdBIbrqFMDlfX-/view↩
A truthful accounting of the finances of Intrust Bank Arena in downtown Wichita shows a large loss. Despite hosting the NCAA basketball tournament, the arena’s “net income” fell.
The true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters cite a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and it hides the true economics of the arena. What’s missing is depreciation expense.
Intrust Bank Arena Payments to Sedgwick County. Click for largerThere are at least two ways of looking at the finance of the arena. Nearly all attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and SMG, a company that operates the arena.
This agreement specifies a revenue sharing mechanism between the county and SMG. For 2108, the accounting method used in this agreement produced a profit, or “net building income,” of $647,634 to be split (not equally) between SMG and the county. The county’s share was $123,817. 1
While described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations in conformity with accounting principles generally accepted in the United States of America.” 2
Intrust Bank Arena Payments to Sedgwick County. Click for larger.That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.
A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2018 Comprehensive Annual Financial Report for Sedgwick County. 3 This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially last year. In that respect, it is a report card of our ability to manage our financial resources.”
Regarding the arena in 2018, the CAFR states:
The Arena Fund represents the activity of the INTRUST Bank Arena. The facility is operated by a private company; the County incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any, and naming rights fees. The Arena Fund had an operating loss of $4.5 million. The loss can be attributed to $4.8 million in depreciation expense.
Financial statements in the same document show that $4,783,229 was charged for depreciation in 2017. If we subtract the SMG payment to the county of $123,817 from depreciation expense, we learn that the Intrust Bank Arena lost $4,659,412 in 2018.
(Of note, 2018 was the year the arena hosted a round of NCAA men’s basketball tournament games. For that year, the payment from SMG to the county was down by 58.8 percent from $300,414 in 2017. Attendance rose by 4.2 percent.)
Depreciation expense is not something that is paid out in cash. That is, Sedgwick County did not write a check for $4,659,412 to pay depreciation expense. Instead, depreciation accounting provides a way to recognize and account for the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.
But not many of our civic leaders recognize this, at least publicly. We — frequently — observe our governmental and civic leaders telling us that we must “run government like a business.” The county’s financial report makes mention of this: “Sedgwick County has one business-type activity, the Arena fund. Net position for fiscal year 2018 decreased by $4.7 million to $151.6 million. Of that $151.6 million, $142.9 million is invested in capital assets. The decrease can be attributed to depreciation, which was $4.8 million.”4 (emphasis added)
At the same time, these leaders avoid frank and realistic discussion of economic facts. As an example, in years past Commissioner Dave Unruh made remarks that illustrate the severe misunderstanding under which he and almost everyone labor regarding the nature of spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”
The contention — witting or not — is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) in the arena is merely a historical artifact, something that happened in the past, something that has no bearing today. There is no opportunity cost, according to this view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds. Since Kansas is one of the few states that adds sales tax to food, low-income households paid extra sales tax on their groceries to pay for the arena — an arena where they may not be able to afford tickets.
Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct that depreciation expense is not a cash expense that affects cash flow, it is an economic reality that can’t be ignored — except by politicians, apparently. The Wichita Eagle and Wichita Business Journal aid in promoting this deception.
The upshot: We’re evaluating government and making decisions based on incomplete and false information, just to gratify the egos of self-serving politicians and bureaucrats.
Reporting on Intrust Bank Arena financial data
In February 2015 the Wichita Eaglereported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time. Neither did the Eagle article.
In December 2014, in a look at the first five years of the arena, its manager told the Wichita Eagle this: “‘We know from a financial standpoint, the building has been successful. Every year, it’s always been in the black, and there are a lot of buildings that don’t have that, so it’s a great achievement,’ said A.J. Boleski, the arena’s general manager.”
The Wichita Eagle opinion page hasn’t been helpful, with Rhonda Holman opining with thoughts like this: “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.” (For some years, the county paid to create a large “check” for publicity purposes.)
That followed her op-ed from a year before, when she wrote: “And, of course, Intrust Bank Arena has the uncommon advantage among public facilities of having already been paid for, via a 30-month, 1 percent sales tax approved by voters in 2004 that actually went away as scheduled.” That thinking, of course, ignores the economic reality of depreciation.
In 2018, the Wichita Eagle reported, based on partial-year results: “Intrust Bank Arena remains profitable but is reporting a 20 percent drop in income this year, despite a bump from the NCAA March Madness basketball tournament. Net income for the first three quarters of this year was about $556,000. That’s down from just shy of $700,000 last year, according to a report to the Sedgwick County Commission.” 5 This use of “profitable” is based only on the special revenue-sharing agreement, not generally accepted accounting principles.
Even our city’s business press — which ought to know better — writes headlines like Intrust Bank Arena tops $1.1M in net income for 2015 without mentioning depreciation expense or explaining the non-conforming accounting methods used to derive this number.
All of these examples are deficient in an important way: They contribute confusion to the search for truthful accounting of the arena’s finances. Recognizing depreciation expense is vital to understanding profit or loss, we’re not doing that.
—
Notes
The Operations of INTRUST Bank Arena, as Managed by SMG. Independent Auditor’s Report and Special-Purpose Financial Statements. December 31, 2018. Available here. ↩
The City of Wichita plans subsidized development of a sports facility as an economic driver. Originally published in July 2017.
West Bank Redevelopment District. Click for larger.This week the Wichita City Council will consider a project plan for a redevelopment district near Downtown Wichita. It is largely financed by Tax Increment Financing and STAR bonds. Both divert future incremental tax revenue to pay for various things within the district.12
City documents promise this: “The City plans to substantially rehabilitate or replace Lawrence-Dumont Stadium into a multi-sport athletic complex. The TIF project would allow the City to make investments in Lawrence-Dumont Stadium, construct additional parking in the redevelopment district, initiate improvements to the Delano multi-use path and make additional transportation improvements related to the stadium project area. In addition to the stadium work, the City plans to construct, utilizing STAR bond funds, a sports museum, improvements to the west bank of the Arkansas River and construct a pedestrian bridge connecting the stadium area with the Century II block. The TIF project is part of the overall plan to revitalize the stadium area and Delano Neighborhood within the district.”3
We’ve heard things like this before. Each “opportunity” for the public to invest in downtown Wichita is accompanied by grand promises. But actual progress is difficult to achieve, as evidenced by the examples of Waterwalk, Kenmar,and Block One.4
Trends of business activity in downtown Wichita. Click for larger.In fact, change in Downtown Wichita — if we’re measuring the count of business firms, jobs, and payroll — is in the wrong direction, despite large public and private investment. 5
Perhaps more pertinent to a sports facility as an economic growth driver is the Intrust Bank Arena. Two years ago the Wichita Eagle noted the lack of growth in the area. 6 Since then, not much has changed. The area surrounding the arena is largely vacant. Except for Commerce Street, that is, and the businesses located there don’t want to pay their share of property taxes. 7
I’m sure the city will remind us that the arena was a Sedgwick County project, not a City of Wichita project, as if that makes a difference. Also, the poor economic performance cited above is for Downtown Wichita as delineated by zip code 67202, while the proposed baseball stadium project lies just outside that area, as if that makes a difference.
By the way, this STAR bonds district is an expansion of an existing district which contains the WaterWalk development. That development has languished, with acres of land having been available for development for many years. We’ve also found that the city was not holding the WaterWalk developer accountable to the terms of the deal that was agreed upon, to the detriment of Wichita taxpayers. 8
Following, selected articles on the economics of public financing of sports stadiums.
The Economics of Subsidizing Sports Stadiums
Scott A. Wolla, “The Economics of Subsidizing Sports Stadiums,” Page One Economics, May 2017. This is a project of the Federal Reserve Bank of St. Louis. Link.
“Building sports stadiums has an impact on local economies. For that reason, many people support the use of government subsidies to help pay for stadiums. However, economists generally oppose such subsidies. They often stress that estimations of the economic impact of sports stadiums are exaggerated because they fail to recognize opportunity costs. Consumers who spend money on sporting events would likely spend the money on other forms of entertainment, which has a similar economic impact. Rather than subsidizing sports stadiums, governments could finance other projects such as infrastructure or education that have the potential to increase productivity and promote economic growth.”
What economists think about public financing for sports stadiums
Jeff Cockrell, Chicago Booth Review, February 01, 2017. Link.
“But do the economic benefits generated by these facilities — via increased tourism, for example — justify the costs to the public? Chicago Booth’s Initiative on Global Markets put that question to its US Economic Experts Panel. Fifty-seven percent of the panel agreed that the costs to taxpayers are likely to outweigh benefits, while only 2 percent disagreed — though several panelists noted that some contributions of local sports teams are difficult to quantify.”
Publicly Financed Sports Stadiums Are a Game That Taxpayers Lose
Jeffrey Dorfman. Forbes, January 31, 2015. Link.
“Once you look at things this way, you see that stadiums can only justify public financing if they will draw most attendees from a long distance on a regular basis. The Super Bowl does that, but the average city’s football, baseball, hockey, or basketball team does not. Since most events held at a stadium will rely heavily on the local fan base, they will never generate enough tax revenue to pay back taxpayers for the cost of the stadium.”
Sports Facilities and Economic Development
Andrew Zimbalist, Government Finance Review, August 2013. Link.
“This article is meant to emphasize the complexity of the factors that must be evaluated in assessing the economic impact of sports facility construction. While prudent planning and negotiating can improve the chances of minimizing any negative impacts or even of promoting a modest positive impact, the basic experience suggests that a city should not expect that a new arena or stadium by itself will provide a boost to the local economy.
Instead, the city should think of the non-pecuniary benefits involved with a new facility, whether they entail bringing a professional team to town, keeping one from leaving, improving the conveniences and amenities at the facility, or providing an existing team with greater resources for competition. Sports are central to cultural life in the United States (and in much of the world). They represent one of the most cogent ways for residents to feel part of and enjoy belonging to a community. The rest of our lives are increasingly isolated by modern technological gadgetry. Sport teams help provide identity to a community, and it is this psychosocial benefit that should be weighed against the sizeable public investments that sports team owners demand.”
Professional Sports as Catalysts for Metropolitan Economic Development
Robert A. Baade, Journal of Urban Affairs, 1996. Link.
“To attract or retain a team, cities are offering staggering financial support and rationalize their largesse on economic grounds. Do professional sports increase income and create jobs in amounts that justify the behavior of cities? The evidence detailed in this paper fails to support such a rationale. The primary beneficiaries of subsidies are the owners and players, not the taxpaying public.”
“Ten years ago, Elizabeth Stevenson looked out at the neighborhood where a downtown arena would soon be built and told an Eagle reporter that one day it could be the ‘Paris of the Midwest.’ What she and many others envisioned was a pedestrian and bike-friendly neighborhood of quaint shops, chic eateries and an active arts district, supported by tens of thousands of visitors who would be coming downtown for sporting events and concerts. It hasn’t exactly turned out that way. Today, five years after the opening of the Intrust Bank Arena, most of the immediate neighborhood looks much like it did in 2004 when Stevenson was interviewed in The Eagle. With the exception of a small artists’ colony along Commerce Street, it’s still the same mix of light industrial businesses interspersed with numerous boarded-up buildings and vacant lots, dotted with ‘for sale’ and ‘for lease’ signs.” Lefler, Dion. 5 years after Intrust Bank Arena opens, little surrounding development has followed.Wichita Eagle. December 20, 2014. Available at http://www.kansas.com/news/local/article4743402.html. ↩
The praise for retired Sedgwick County Commissioner Dave Unruh can’t be based on our region’s accomplishments under his guidance. That is, if people are informed and truthful.
He easily won re-election because his constituents and the rest of us knew he was dedicated to strengthening our community, region and the state.
…
In economic development Commissioner Unruh was chairman in 2006 when the board voted to build a world-class technical-education facility to ensure we remained competitive for new jobs. The National Center for Aviation Training is home to the growing WSU Tech. He also championed smart economic development programs that generated additional tax dollars and regional cooperation through REAP and other efforts.
…
In his perseverance to get things done and his belief in our future, he’s made a difference.
On Sunday, the Wichita Eagle published a drawing by cartoonist Richard Crowson which lauded Unruh’s championing of the Intrust Bank Arena, Sedgwick County Zoo, Exploration Place, and mental health services. Responding on his Facebook profile, Commissioner Michael O’Donnell wrote this for public consumption:
“A society grows great when old men plant trees whose shade they know they will never sit in” I believe this Greek proverb sums up the leadership of Dave Unruh as much as this stupendous Wichita Eagle cartoon. Our community has been blessed by the selfless and indelible leadership of Dave Unruh. I believe he was the most consequential local leader in our region for the last 2 decades and those of us fortunate enough to live in Sedgwick County are able to sit under the countless trees which Dave planted for us and our families for generations to come.
There’s another way to look at the Dave Unruh legacy in Sedgwick County, and that is through the lens of data. A shiny downtown area is nice, but not as nice as a prospering economy. Here are some figures.
In 2001, the year when Unruh assumed office in its first month, the median household income in Sedgwick County was higher than that of both Kansas and the United States. By 2017, Unruh’s last full year on the commission, Sedgwick County had fallen behind both, and by significant margins.
In 2001, the poverty rate in Sedgwick County was lower than that for the nation. By 2017, the situation was reversed: The Sedgwick County poverty rate is now higher, and significantly higher.
Looking at other measures of prosperity, we see Sedgwick County falling behind during the time Unruh was in office. Gross domestic product, personal income, per capita personal income, population, total employment, wage and salary employment, and manufacturing employment: In all these measures Sedgwick County underperformed the nation, and usually the State of Kansas. (GDP is available only for the Wichita metropolitan area, which is dominated by Sedgwick County.)
By himself, Dave Unruh isn’t responsible for this economic performance. Many others contributed at Wichita City Hall and the Kansas Capitol, as well as some of Unruh’s colleagues on the Sedgwick County Commission. Unruh and they supported the interventionist, corporatist model of economic development, and it hasn’t worked. That’s why it’s surprising to see so much praise for Unruh. It’s sad, too, because if business leaders and politicians really believe the “Unruh way” is the way that works, the outlook for our region is bleak.
Remarks from a candidate for Sedgwick County Commission call for presenting a unified front to the public.
Speaking to the Wichita Pachyderm Club, Sedgwick County Commission candidate Hugh Nicks called for leadership to end what he called “divisive behavior:” “We can’t have — we can’t have the kind of divisive behavior that we have going on right now — we just — it’s just not — it’s just not acceptable.”
His opponent in the August Republican Party primary election is Richard Ranzau, who currently holds the office.
The “divisive behavior” that Nicks objects to takes several forms, but it’s clear he thinks that the Sedgwick County Commission should present a united front: The commission should have a plan that’s agreed to, and if commissioners don’t follow the plan, there should be consequences. At least that’s the moral of a story he told members of guests of the Wichita Pachyderm Club.
That attitude is problematic. Especially so because the Sedgwick County Commission is different from a legislature. At the commission, there is no opportunity for interested parties — lobbyists and regular people — to testify before a committee as legislation is being developed. At the commission, there is no committee mark-up process in which the text of a bill is crafted and finalized. There is no committee vote that decides whether to recommend the bill to the entire legislative body.
So there really isn’t much debate or disagreement in public at the Sedgwick County Commission meetings. And when there is, it may be squelched. Last year a commissioner attempted to offer two amendments to a proposal. He was trying to generate a consensus. But the majority of commissioners wouldn’t have it, and the vote happened without considering the amendments. (See For Sedgwick County Commission, too much debate.)
It’s important that there be discussion in public, even if “divisive.” The prelude to the Kansas Open Meetings Act gives a reason why: “In recognition of the fact that a representative government is dependent upon an informed electorate, it is declared to be the policy of this state that meetings for the conduct of governmental affairs and the transaction of governmental business be open to the public.” 1
When things are not done in view of the public, we call them backroom deals, with all the well-deserved negative connotations. Here’s an example, from 2012: Sedgwick County staff and several commissioners worked out a deal to sell an unused radio tower for $280,000. Commissioners Ranzau and Peterjohn thought there should be an auction. There was an auction, and the county received net proceeds of $553,872. 2
There is already too much suspicion that backroom deals are common at the county and City of Wichita. The more important and “divisive” a matter is, the more discussion it deserves in public.
But that isn’t the attitude of candidate Nicks when he said, “It’d be like a business: I mean, if in our business when we had closed door meetings when, when we argue about how we move forward, in our, in our business, we didn’t go out in front of our employees afterwards and act the same way that we did back behind closed doors. It just doesn’t work. And if we went and acted that way in front of our customers, if we did, we wouldn’t have any customers.”
Business and government are different things. A business is accountable only to its owners and shareholders, and also to the public by acting lawfully. Other than this, a business can do what it wants. It may make decisions using any means its owners tolerate. 3
Government, however, is different. It should be accountable to the people. Sometimes — frequently — that requires “divisive” discussion and debate. And the more important the matter, the more discussion and debate — transparency — is needed.
It’s a lot easier on commissioners if the attitude is “go along to get along.” That attitude has led to a faltering Wichita economy as majorities of members of the Wichita City Council and Sedgwick County Commission have avoided debate and gone along with the advice of staff and economic development regimes. I think this is the strategy of Hugh Nicks, should he be elected to the commission.
It might be tempting to dismiss these remarks as having been made by an uninformed candidate. But Nicks says he has been running since October 2017 so that he can learn about the issues.4
Following are excerpts of remarks of Hugh Nicks and Richard Ranzau at the Wichita Pachyderm Club, June 8, 2018.
Hugh Nicks:
In the area — in the area of leadership, uh, it always starts at the top. Yeah, it doesn’t matter what organization it is, it always starts at the top. I’ll give you just a couple of examples. Uh, when I first started out as a young guy, and I was coaching, I worked for a guy Lafayette Norwood. Maybe some of you know that name. Uh, he was the first black basketball coach — the city league’s first black coach in the city of Wichita, actually. And I worked for the man for two years and learned some hard lessons from him because he wanted to fire me a couple times.
Yeah, he wanted to fire me because one day I decided I’d run some drills that he would not have agreed upon and when we got back in the locker room and got all the kids checked out, he came and said, “I believe I’m gonna fire you.” I said, “I need that job.” It pays 6,200 dollars a year. I already said that. He said, “Well I saw what you were doing down at the other end of the court. It’s not what we agreed on. And uh, so, when we have a plan, we leave this, this office, then you’re gonna do what you’re supposed to do, and you’re not gonna counter anything that I say out on that floor because we’re a team and we’re gonna move forward.”
Uh, so that — that was one of my first lessons that I learned with regard to leadership. But I, I think it starts at the top, so here’s what I see at the county: Um, you know, we can’t have — we can’t have the kind of divisive behavior that we have going on right now — we just — it’s just not — it’s just not acceptable.
Now, it’s alright to disagree in my view. I mean, I’m probably one of the — one of the guys that disagree with and vehemently if I have a strong opinion. But it’s not done in public. You just — you just — you just can’t do that. So, if you want to have an argument with me and go back behind closed doors and have it all day long, that’s alright with me. But when we come out and we’re in front of a staff, then were gonna act differently, and we’re certainly gonna act differently in front of our constituents — in front of, in front of the, the people that we represent. It’d be like a business: I mean, if in our business when we had closed door meetings when, when we argue about how we move forward, in our, in our business, we didn’t go out in front of our employees afterwards and act the same way that we did back behind closed doors. It just doesn’t work. And if we went and acted that way in front of our customers, if we did, we wouldn’t have any customers.
So I’m a proponent, and trying to answer that question from back there in, in terms of leadership style, that we need a different leadership style in the county. Now Richard’s probably gonna take exception with that because he fights for what he believes in and I understand that. But it’s a matter of the way we go about it in my view, uh, and everything starts at the top. I mean, it starts at the top and works its way down, uh, that’s — that’s how I view that.
As a result of system upgrades, the county no longer needs a radio tower located near 77th Street North and Interstate 135. Pixius Communications, LLC made an offer to purchase the tower and the five acre tower site for $280,000. The county proceeded making arrangements for the sale, preparing a sales agreement contract between Sedgwick County and Pixius with a sales price of $280,000, along with several other legal documents necessary to support the sale. … But commissioners Richard Ranzau and Karl Peterjohn felt that the best way to sell the tower was through an auction. … The result of the auction? A Florida company offered $610,000. After a sales commission ($55,000) and half of closing costs ($1,128), the county will net $553,872. That’s almost twice the price the county manager and two commissioners were willing to sell the tower for. See Weeks, Bob. Sedgwick County tower sale was not in citizens’ best interest. Available at https://wichitaliberty.org/sedgwick-county-government/sedgwick-county-tower-sale-was-not-in-citizens-best-interest/. ↩
It’s true that some government officials say we must run government like a business. They usually mean that until they are held to the standards of accountability the private sector faces. Then, things are different. Accountability is avoided. (The non-discussion of expenses of the Intrust Bank Arena is an example of evading business-type accountability by members of the Sedgwick County Commission. See Intrust Bank Arena loss for 2017 is $4,222,182.) ↩
“You may wonder why I’m announcing so early, since the Republican Primary for the County Commission seat isn’t until August 2018. The reason is simple. I like to do my homework. I want to learn about the way Sedgwick County governs, and the rationale behind the decisions that have been made. I want to learn about the issues that are most important to the people in the 4th District. I think serving as County Commissioner is too important to take an on-the-job-training approach, and I don’t want to be on a learning curve at the taxpayers’ expense.” Nicks4commissioner.com. News. October 19, 2017. Available at http://www.nicks4commissioner.com/news.html. . ↩
Click for larger.There has been much public and private investment in Downtown Wichita. What has been the trend in business activity during this time?
According to the 2017 report from Wichita Downtown Development Corporation (now known as Downtown Wichita), over the past decade there has been $593,868,858 in private investment, $160,522,002 in public investment, and $171,087,276 investment in Intrust Bank Arena. That’s $925 million of investment in downtown over this period, with more before. 1
What has been the result of this investment? If you expected business growth in downtown Wichita, you may be disappointed. For the past decade business activity in downtown Wichita has been on a downhill trend. The data for 2016 is a bit of good news, with the decline stopping and business activity remaining mostly unchanged. It isn’t the vibrant growth we’ve been told is happening in downtown Wichita, but at least things are not getting worse.
The data
Click for larger.The United States Census Bureau tracks business data by zip code. 2 The data that is available includes the number of business establishments, the number of employees, and the annual payroll, expressed in thousands of dollars not adjusted for inflation. It includes private-sector workers only, so it does not count all workers.
Nearby are results for zip code 67202, which has nearly the same boundaries as the Self-Supporting Municipal Improvement District (SSMID). This is a district that pays extra property tax for supporting the WDDC. Its boundaries, roughly, are from Kellogg north to Central, and the Arkansas River east to Washington. It is greater Downtown Wichita plus Old Town.
The results since 2007 show fewer business establishments, fewer people working downtown, and lower earnings generated in downtown Wichita. In nearly all cases for nearly all years, the trend is lower — except for 2016.
For 2016 the numbers are nearly unchanged, with only small changes from the previous year. The number of business establishments is down slightly, while the number of employees and annual payroll rose, also slightly.
Except for 2016, this is movement in the wrong direction, the opposite of progress. And 2016 represents merely a stop in the downhill slide, not growth. There may be good news in that the number of people living downtown may be rising. But in estimating the population of downtown Wichita, economic development officials use a circuitous method. The result of their calculations is a population much higher than Census Bureau estimates, far outside the range of probable results. 3
As in years past, a truthful accounting of the finances of Intrust Bank Arena in downtown Wichita shows a large loss.
The true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters cite a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and it hides the true economics of the arena. What’s missing is depreciation expense.
There are at least two ways of looking at the finance of the arena. Nearly all attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and SMG, a company that operates the arena. 1
This agreement specifies a revenue sharing mechanism between the county and SMG. For 2107, the accounting method used in this agreement produced a profit, or “net building income,” of $1,000,829 to be split (not equally) between SMG and the county. The county’s share was $300,414. 2
While described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations in conformity with accounting principles generally accepted in the United States of America.” 3
Intrust Bank Arena Payments to Sedgwick County. Click for larger.That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.
A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2017 Comprehensive Annual Financial Report for Sedgwick County. 4 This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially last year. In that respect, it is a report card of our ability to manage our financial resources.”
Regarding the arena, the CAFR states:
The Arena Fund represents the activity of the INTRUST Bank Arena. The facility is operated by a private company; the County incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any, and naming rights fees. The Arena Fund had an operating loss of $4.3 million. The loss can be attributed to $4.5 million in depreciation expense.
Financial statements in the same document show that $4,522,596 was charged for depreciation in 2017.
Trends of events and attendance at Intrust Bank Arena. Click for larger.If we subtract SMG payment of $300,414 from depreciation expense, we learn that the Intrust Bank Arena lost $4,222,182 in 2016.
Depreciation expense is not something that is paid out in cash. That is, Sedgwick County did not write a check for $4,522,596 to pay depreciation expense. Instead, depreciation accounting provides a way to recognize and account for the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.
But not many of our civic leaders recognize this, at least publicly. We — frequently — observe our governmental and civic leaders telling us that we must “run government like a business.” The county’s financial report makes mention of this: “Sedgwick County has one business-type activity, the Arena fund. Net position for fiscal year 2017 decreased by $4.3 million to $156.3 million. Of that $156.3 million, $146.0 million is invested in capital assets. The decrease can be attributed to depreciation, which was $4.5 million.” 5 (emphasis added)
At the same time, these leaders avoid frank and realistic discussion of economic facts. As an example, in years past Commissioner Dave Unruh made remarks that illustrate the severe misunderstanding under which he and almost everyone labor regarding the nature of spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”
The contention — witting or not — is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) in the arena is merely a historical artifact, something that happened in the past, something that has no bearing today. There is no opportunity cost, according to this view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds. Since Kansas is one of the few states that adds sales tax to food, low-income households paid extra sales tax on their groceries to pay for the arena — an arena where they may not be able to afford tickets.
Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct that depreciation expense is not a cash expense that affects cash flow, it is an economic reality that can’t be ignored — except by politicians, apparently. The Wichita Eagle and Wichita Business Journal aid in promoting this deception.
The upshot: We’re evaluating government and making decisions based on incomplete and false information, just to gratify the egos of self-serving politicians and bureaucrats.
Reporting on Intrust Bank Arena financial data
In February 2015 the Wichita Eaglereported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time. Neither did the Eagle article.
In December 2014, in a look at the first five years of the arena, its manager told the Wichita Eagle this: “‘We know from a financial standpoint, the building has been successful. Every year, it’s always been in the black, and there are a lot of buildings that don’t have that, so it’s a great achievement,’ said A.J. Boleski, the arena’s general manager.”
The Wichita Eagle opinion page hasn’t been helpful, with Rhonda Holman opining with thoughts like this: “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.” (For some years, the county paid to create a large “check” for publicity purposes.)
That followed her op-ed from a year before, when she wrote: “And, of course, Intrust Bank Arena has the uncommon advantage among public facilities of having already been paid for, via a 30-month, 1 percent sales tax approved by voters in 2004 that actually went away as scheduled.” That thinking, of course, ignores the economic reality of depreciation.
Even our city’s business press — which ought to know better — writes headlines like Intrust Bank Arena tops $1.1M in net income for 2015 without mentioning depreciation expense or explaining the non-conforming accounting methods used to derive this number.
All of these examples are deficient in an important way: They contribute confusion to the search for truthful accounting of the arena’s finances. Recognizing depreciation expense is vital to understanding profit or loss, we’re not doing that.
—
Notes
Management Agreement between Sedgwick County and SMG. August 1, 2007. Available here. ↩
Minutes of the Sedgwick County Commission, February 14, 2018. ↩
Management Agreement between Sedgwick County and SMG. ↩
There are at least two ways of looking at the finance of the arena. Nearly all attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and ASM Global, a company that operates the arena. SMG, the former operator of the arena, merged with another company to form ASM Global.
An excerpt from the first page of the CEDBR analysis. Click for larger.
Looking at other measures of prosperity, we see Sedgwick County falling behind during the time Unruh was in office. Gross domestic product, personal income, per capita personal income, population, total employment, wage and salary employment, and manufacturing employment: In all these measures Sedgwick County underperformed the nation, and usually the State of Kansas. (GDP is available only for the Wichita metropolitan area, which is dominated by Sedgwick County.)
There are at least two ways of looking at the finance of the arena. Nearly all attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and SMG, a company that operates the arena. 1
There are at least two ways of looking at the finance of the arena. Nearly all attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and 
There are at least two ways of looking at the finance of the arena. Nearly all attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and 
