Tag Archives: Jeff Blubaugh

Wichita being sued, alleging improper handling of bond repayment savings

A lawsuit claims that when the City of Wichita refinanced its special assessment bonds, it should have passed on the savings to the affected taxpayers, and it did not do that.

A lawsuit filed in Sedgwick County District Court charges that the City of Wichita improperly handled the savings realized when it refinanced special assessment bonds at a lower interest rate. The case is 2018-CV-001567-CF, filed on July 13, 2018, and available here.

The suit names David L. Snodgrass and Leslie J. Snodgrass as plaintiffs, and a long list of defendants, namely:

  • The City of Wichita, Kansas
  • Wichita City Manager Robert Layton
  • Wichita Finance Director Shawn Henning and Former Wichita Finance Director Kelly Carpenter
  • Wichita City Clerk Karen Sublett
  • Wichita Mayor Jeff Longwell and former Wichita Mayor Carl Brewer
  • Current Wichita City Councilmembers Brandon Johnson, Pete Meitzner, James Clendenin, Jeff Blubaugh, Bryan Frye, and Cindy Claycomb
  • Former Wichita City Councilmembers Lavonta Williams, Janet Miller, Sue Schlapp, Paul Gray, Jeff Longwell, Jim Skelton, and Michael O’Donnell
  • Springsted Incorporated
  • Gilmore And Bell, A Professional Corporation
  • Kutak Rock, LLP
  • Sedgwick County Treasurer Linda Kizzire

The suit asks for a class to be created consisting of “all other affected land owners paying excess special assessments,” which would, undoubtedly, be many thousands of land owners. No specific amount of relief is requested.

The suit’s basis

The city borrows money by issuing bonds to fund improvements to (generally) new neighborhoods. These bonds pay for things like residential streets, water pipes, and sewer lines. The debt service for these bonds, that is, the money needed to make the bond payments, is charged to benefitting property owners in the form of special assessment taxes, often called “specials.” These specials are separate from the general property taxes that are charged to all property.

General property taxes are based on a property’s assessed value multiplied by a mill levy rate. Specials, however, are based on the cost of the infrastructure and the payments needed to retire the debt. This amount is determined at the time bonds are sold and the repayment schedule is established. (Bond payments depend on the amount borrowed, the length of the repayment period, and the interest rate. All this is known at the time the bonds are issued.)

These specials usually last 15 years, and after paid, no longer appear on a property’s tax bill. Sometimes special assessments are prepaid.

What the city did, and didn’t do, according to plaintiffs

During the last decade, interest rates on long-term bonds generally fell. In response, the city issued refunding bonds. These bonds took advantage of low interest rates by paying off old bonds that had higher interest rates, replacing them with bonds with lower interest rates. The lawsuit alleges that since 2009, the city has issued $216 million in refunding bonds saving $60.2 million, according to city documents cited in the lawsuit. The suit does not specify how much of this savings is attributed to special assessment bonds.

So the city refinanced special assessment debt at a lower rate, reducing the cost of the debt. That’s good. Homeowners often do this when mortgage rates are low, and it’s good that the city does this too.

The problem, according to the lawsuit, is that some of the refinanced debt was special assessment debt. The lawsuit contends that, based on Kansas law, the city should have passed on the savings to the property owners that were paying off this special assessment debt. Instead, says the suit, “the City of Wichita transferred the excess special assessment money paid by affected Wichita taxpayers to support its general fund and/or other municipal funds.” In other words, the city spent the savings on other things, when it should have directed the savings to land owners who were paying the special taxes.

Plaintiffs allege that the conduct of the city and its advisors constitutes fraud against those paying special assessment taxes:

The fraudulent actions of Defendant City of Wichita, along with the other Wichita Defendants, and Defendants Springsted, Gilmore and Bell and Kutak Rock resulted in the misappropriation of millions of dollars of “saved” tax payments that should have been returned to Plaintiffs along with all other affected land owners paying special assessments levied under the General Improvement and Assessment Laws of the State of Kansas.

Further, the suit alleges that the liability faced by many of the defendants is personal:

Because the Wichita Defendants actively participated in the fraud practiced by Defendant City of Wichita, they cannot escape personal liability for the fraudulent actions of the City of Wichita upon Plaintiffs and all other affected land owners paying special assessments.

While there is one named party as plaintiff, the suit alleges that all similarly situated persons have been harmed, and so a class action is appropriate. That would be all property owners who have paid special assessment taxes to Wichita since 2009, including myself.

CID and other incentives approved in downtown Wichita

The Wichita City Council approves economic development incentives, but citizens should not be proud of the discussion and deliberation.

Today’s meeting of the Wichita City Council saw the council discuss and approve economic development incentives for a project in downtown Wichita.

The item contemplated economic development incentives for redevelopment of an empty building in downtown Wichita to become a Hilton Garden Inn Hotel. The incentives being considered were a Community Improvement District (CID), Industrial Revenue Bonds (IRB), a parking agreement, and a skywalk easement. The discussion by the council was useful for revealing two members who are opposed to some targeted economic development incentives, but it also showed a troubling lack of knowledge and consideration by others.

Property tax

The hotel is requesting industrial revenue bonds. These bonds do not mean the city is lending any money. Instead, IRBs in Kansas are a mechanism to convey property tax abatements and sales tax exemptions.

The agenda packet for this item states: “[Hotel developer] WDH is not requesting abatement of property taxes in conjunction with the IRBs.”1 This is presented as a magnanimous gesture, as something the hotel developers (WDH) could have requested, but did not, presumably out of some sort of civic duty.

But: Property tax abatements may not be granted within the boundaries of a TIF district, which this hotel is located within.2 3 So the developers did not request something that they are not entitled to request. This is not news. Nonetheless, several council members were grateful.

As to property taxes, Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) asked what would be the increase in value in the building, once finished. Later Wichita City Council Member Jeff Blubaugh (district 4, south and southwest Wichita) praised the property taxes that will be paid. He also mentioned the “nearly-empty parking garage.” When the city built this garage and accompanying retail space it was to be a showpiece, but has been suffering from blight and lack of tenants paying market rates for rent.4

Asking about tax abatements, Wichita City Council Member Pete Meitzner (district 2, east Wichita) asked “They didn’t apply for other …” His voice trailed off before finishing the question, but the “other” tax abatement that could be applied for is the property tax abatement. Except, the law does not allow for a property tax abatement for this project.

All these questions alluded to the increased property taxes the renovated building will pay. Except, being within a TIF district, property taxes may not be abated. So where will the hotel’s property taxes go?

First, the property tax generated by the present value of the property (the “base”) will be distributed as before. But the increment — which will be substantial — will go to the TIF district, not the city, county, and school district. Except: This is an unusual TIF district, in that an agreement between the city and county provides that only 70 percent of the incremental property taxes will go to the TIF district, with the remainder being distributed as usual. This was not mentioned during today’s discussion.

There was talk about a “gap.” Some economic development incentives require documenting of a “financing gap” that makes the project not economically feasible. But that is not required for the incentives considered for this hotel.

Sales tax

Regarding the sales tax exemption: City document do not state how much sales tax will be forgiven, so we’re left to speculate. Previous city documents5 indicate spending $3,000,000 on furniture and fixtures, which is taxable. Sales tax on this is $225,000.

The same city document mentioned spending of $6,250,000 on construction of the hotel, and of $1,000,000 for construction of retail space. Sales tax on this combined total is $543,750. Based on material from the Kansas Department of Revenue, these amounts would be due if not for the action of the city council.6

In total, the development of this hotel will escape paying $768,750 in sales tax. It should be noted that Kansas is one of the few states that charges sales tax on groceries at the same rate as other purchases, making Kansas food sales tax among the highest in the nation.7

Curiously, council members Clendenin and Williams, who represent low-income districts where families may be struggling to buy groceries — and the sales tax on them — did not object to this special sales tax treatment for a commercial developer.

No more cash?

In his remarks, the mayor talked about how we can continue with economic development “without handing cash to corporations.” But when a project is going to buy materials and services on which $768,750 in sales tax is normally due, and the city council takes action to extinguish that liability, well, that’s better than cash to the receiver.

Good news

Kudos to Wichita City Council Member Bryan Frye (district 5, west and northwest Wichita), who actually cited the United States Constitution in his statement from the bench. He said that the issues surrounding this project are a far cry from what our Founding Fathers envisioned as the role of government, saying “I struggle with using city resources to collect and distribute sales tax for the sole benefit of one commercial entity.” He offered a substitute motion which would have approved all the parts of the agreement except for the CID tax. His motion failed, with only he and Wichita Mayor Jeff Longwell voting in favor.

On the original motion, which was to approve all parts of the incentive agreement, Longwell and Frye voted in opposition, with everyone else voting in favor.


Notes

  1. City of Wichita. Agenda packet for September 6, 2016. Available here.
  2. “Certain property, even though funded by industrial revenue bonds, does not qualify for exemption: … property located in a redevelopment project area established under K.S.A. 12-1770 et seq. cannot be exempt from taxation.” Kansas Department of Revenue. Property Tax Abatements. Available at www.ksrevenue.org/taxincent-proptaxabate.html. Also, Kansas Department of Commerce. Industrial Revenue Bond Exemptions. Available at www.kansascommerce.com/DocumentCenter/Home/View/1082.
  3. Gilmore & Bell PC. Economic Development tools. Available here.
  4. Weeks, Bob. As landlord, Wichita has a few issues. Available at https://wichitaliberty.org/wichita-government/landlord-wichita-issues/.
  5. Wichita City Council Agenda packet for August 16, 2016. Available at wichita.gov/Government/Council/Agendas/08-16-2016%20City%20Council%20Agenda%20Packet.pdf.
  6. “General rule: Materials are taxable.” (p. 4) Also: “Taxable labor services in Kansas are the services of installing, applying, servicing, repairing, altering, or maintaining tangible personal property performed on real property projects in the general category of commercial remodel work.” (p. 8) Kansas Department of Revenue. Sales & Use Tax for Contractors, Subcontractors, and Repairmen. Available at www.ksrevenue.org/pdf/pub1525.pdf.
  7. Food sales tax a point of shame for Kansas. Wichita Eagle. January 25, 2016. Available at http://www.kansas.com/opinion/editorials/article56532903.html.

Blubaugh, Mayor vote for licenses for undocumented workers to drive to their illegal jobs

The Wichita city council voted to recommend that the Kansas Legislature create drivers permits for undocumented workers so they could drive to their jobs.

In December the Wichita City Council voted to include drivers permits for undocumented workers in its legislative agenda. The item as presented to council members read: “RECOMMEND: The Wichita City Council supports legislation that provides a driver’s permit to undocumented workers for the sole purpose of obtaining vehicle insurance for work-related transportation.”

In his remarks, as presented in the meeting minutes, Wichita Mayor Carl Brewer stated “he has given this a lot of thought and he is the one who has asked for it because he believes it is the right thing to do.”

Wichita City Council Member Jeff Blubaugh
Wichita City Council Member Jeff Blubaugh
The measure passed four to three, with Council Member Jeff Blubaugh (district 4, south and southwest Wichita) voting along with the council’s progressive members.

No matter what one believes about our immigration laws, it is illegal for undocumented workers to hold their jobs. Yet, the city wants to make it legal for them to drive to their illegal jobs.

This also illustrates the problem with resolving our nation’s issues with immigration. We’ve shown that we’re not willing to enforce the laws we have. Here, the Wichita City Council takes steps to help illegal immigrants break our laws. Why do we expect people to respect and obey them?